Private Market Solutions to the Savings and Loan Crisis: Bank Holding Company Acquisitions of Savings Associations
Private Market Solutions to the Savings and Loan Crisis: Bank Holding Company Acquisitions of Savings Associations
Lissa Lamkin Broome
LISSA LAMKIN BROOME*
OST of the discussion and legislation relating to the savings and
loan crisis has centered upon governmental intervention and
bailout of failed or failing thrift institutions. The Financial Institutions
Reform, Recovery, and Enforcement Act of 1989 ("FIRREA")
continues this focus, but also contains important provisions facilitating a
nongovernmental, market solution to the savings and loan crisis by
encouraging bank holding companies to purchase thrift institutions. The
significance of the measures added by FIRREA to facilitate a private
resolution of the savings and loan debacle has been overshadowed by the
magnitude of the crisis and may have been overlooked as well because
several of the crucial provisions were added late in the legislative process
and with little fanfare. This Article focuses on this private, market
solution to the savings and loan crisis, which, for a variety of factors, in
addition to its relative lack of notoriety, has not been fully utilized.
When a thrift institution becomes insolvent, the government incurs
substantial costs. The Resolution Trust Corporation ("RTC") is
appointed to dispose of or "resolve" the failed institution.2 In some cases, if
the thrift has little going concern value, the RTC will arrange to pay
* © 1991. All rights reserved. This speech was given by Professor Broome as part
of the annual Financial Institutions and Regulation Symposium at the Fordham
University School of Law.
Associate Professor of Law, University of North Carolina School of Law. B.S. 1978,
University of Illinois; J.D. 1981, Harvard Law School. This project was supported by a
grant from the University of North Carolina Law Center Foundation.
I wish to thank Adam H. Broome, Alexander M. Donaldson, Anthony Gaeta, Jr., S.
Elizabeth Gibson, Sidney A. Shapiro and Ty M. Votaw for their helpful suggestions and
comments on earlier drafts of this Article. In addition, William M. Moore, Jr. and
William Sibley provided helpful information and insights. Finally, I wish to acknowledge
the able research assistance of Christina L. Goshaw and Christine M. Schilling.
1. Pub. L. No. 101-73, 103 Stat. 183 (1989) (codified at various sections of 12 and 15
U.S.C.) [hereinafter FIRREA].
2. See 12 U.S.C. § 1441a(b) (Supp. 1 1989); see generally Lofts, Querio & Jensen,
FinancialInstitutions Receiverships Before and After the FinancialInstitutions Reform,
Recovery and Enforcement Act of 1989, 45 Consumer Finance L.Q. Rep. 158 (1991).
depositors the amounts of their insured deposits and liquidate the thrift's
assets.3 This form of resolution is generally quite costly when the
liquidation value of the assets is substantially less than the amounts owed to
the insured depositors.
If the thrift's going concern value is significant, the RTC will attempt
to find a purchaser who is willing to purchase the assets of the failed
thrift and assume its deposit liabilities.4 Although this form of resolution
is normally far less costly than a payoff of all insured depositors, there is
still substantial government expense. The RTC provides the purchaser
with cash in the amount of the difference between the book value of the
assets acquired and the amount of the liabilities assumed.5 For instance,
in a recent purchase and assumption transaction arranged by the RTC,
the acquiring institution purchased $579 million of the failed thrift's
assets, assumed deposit liabilities of $1.43 billion, and received from the
RTC a cash payment of $859 million, representing the difference between
the value of the assets purchased and the liabilities assumed.' Further,
the RTC gave the purchaser three months after the purchase to review
the acquired assets and sell back to the RTC those assets found to be
nonperforming or otherwise unsatisfactory. 7 Estimates of the total cost
of the thrift crisis vary, but shortly after FIRREA's enactment one
observer predicted that the resolution of insolvent thrifts would cost the
government $166 billion.8
A private market solution to the S&L crisis is the statutory authority
added by FIRREA enabling a bank holding company to purchase a
solvent thrift institution. The infusion of bank holding company capital
into a privately arranged purchase of a thrift, which might save the thrift
from insolvency and ultimate resolution at taxpayer expense, is an
important and significant method of reducing taxpayer costs associated with
the savings and loan crisis.' Since FIRREA's enactment, however,
eminent-assisted rather than private acquisitions of thrifts have
predominated. Bank holding companies have announced private
acquisitions of some $10 billion in thrift assets," but have purchased over $80
billion in thrift deposits in government-assisted transactions from the
Part I of this Article explores the efforts of bank holding companies to
acquire the authority to purchase thrift institutions since 1977, including
the 1982 legislative authorization of bank holding companies' purchases
of insolvent thrift institutions under certain circumstances. Part II
describes the statutes added by FIRREA relating to bank holding company
acquisition of thrift institutions, including the Oakar Amendment, which
permits a bank holding company to purchase a savings association and
combine its operations with those of an existing bank subsidiary. 2
Part III considers the business reasons motivating a bank holding
company's purchase of a thrift institution and the advantages of an
Oakar consolidation of the thrift with an existing bank. This part also
evaluates bank holding company acquisitions of savings associations
since FIRREA's enactment. 3 Explanations are suggested for the great
number of bank holding company acquisitions of insolvent thrifts
compared with the number of insolvent thrift acquisitions that took place
prior to FIRREA and compared with the number of bank holding
company acquisitions of healthy thrifts since FIRREA.
In Part IV, the Article evaluates the goal of permitting bank holding
companies to purchase solvent savings associations to attract bank
holding company capital to the thrift industry. 4 The goal of seeking a source
of private capital for institutions that might otherwise fail and be
disposed of at government expense is found to be worth the potential
financial harm to bank holding company acquirers if the savings association
acquisition proves to be less advantageous than anticipated. To further
encourage the goal of attracting bank holding company capital to thrifts,
interest costs and making other payments to the deposit insurance fund as needed. See
Scott, Never Again: The S&L Bailout Bill 45 Bus. Law. 1883, 1884 (1990).
"Ifthe capital required to strengthen and ensure the viability of healthy and sick thrifts
cannot be attracted from the private sector, it will ultimately have to be furnished by the
public sector." Weiss & Stock, Now Is Time to Let Bank FirmsBuy Healthy Thrifts, Am.
, at 4.
10. Data provided by SNL Securities, LP, Charlottesville, Virginia. The data
includes transactions announced since the enactment of FIRREA through March 18, 1991,
and does not include transactions that were announced but subsequently terminated
during that time period [hereinafter SNL Securities].
11. See id.; Nagle, Analyzing a Thrift Acquisition in Arizona. Am. Banker, Oct. 24,
1990, at 13 ("Of $94.7 billion in thrift assets changing ownership so far this year, 65% of
those assets were acquired by banks."); see also Piro & Nagle, Illinois Deals Perk Up
PrivateSector, Am. Banker, Apr. 3, 1991, at 13
("combined RTC and FDIC sales [of
failed banks and thrifts] accounted for 70% of all assets targeted for acquisition by
financial institutions [in the first quarter of 1991]")
12. See infra text accompanying notes 46-113.
13. See infra text accompanying notes 114-208.
14. See infra text accompanying notes 209-48.
the risks to bank holding company acquirers could be reduced and the
factors identified as limiting solvent thrift acquisitions could be
addressed. Part IV suggests that whether the current statutory and
regulatory risks to bank holding company acquisitions of thrifts should be
reduced is an area for further study, and proposes some modest changes
in the Oakar Amendment and other statutory provisions to further
encourage and attract bank holding company capital to solvent savings
The Bank Holding Company Act of 1956'1 provides that a bank
holding company (a company that controls a bank) 16 may own only bank
subsidiaries and certain nonbanking subsidiaries whose activities are "so
closely related to banking... as to be a proper incident thereto." 7 The
purpose of this limitation is to ensure the separation of banking from
other commercial enterprises so that bank depositors' funds are not
placed at risk by financing nonbanking activities.
Since 1977, if not earlier, bank holding companies have urged the
Federal Reserve Board ("Board") to grant them the authority to purchase
thrift institutions as nonbanking subsidiaries." s Although bank holding
companies were statutorily granted the authority to bid on insolvent
thrifts in 1982, they were not allowed to purchase healthy thrift
institutions until 1989 when Congress authorized such purchases in
FIRREA.1 9 This Part sets forth the development of bank holding company
efforts to purchase thrifts from 1977 until consideration of the FIRREA
In 1977, the Federal Reserve Board, the federal regulator charged with
regulating bank holding companies and their nonbanking subsidiaries,
concluded that although the activities of a thrift institution were closely
related to banking, they were not a proper incident to banking, and
declined to approve the D.H.Baldwin bank holding company's application
to acquire a thrift institution. 0 The Federal Reserve Board gave three
reasons for its finding. First, it was concerned about the regulatory
conflict that might result from the affiliation of a bank holding company and
15. The Bank Holding Company Act is set forth at 12 U.S.C. §§ 1841-50 (1988 &
Supp. 1 1989).
16. See 12 U.S.C. § 1841(a)(1) (1988).
17. Id. § 1843(c)(8).
18. See D.H. Baldwin Co., 63 Fed. Res. Bull. 280, 280 (1977); infra text
accompanying notes 20-45.
19. See infra text accompanying notes 61-74.
20. See D.H. Baldwin Co., 63 Fed. Res. Bull. 280, 281-82, 284, 287 (1977).
a thrift institution.2 1 Second, it feared the erosion of what it described as
a beneficial institutional rivalry between banks and thrifts.' Finally, the
Board was worried that thrift acquisitions would undermine the Bank
Holding Company Act's interstate banking restrictions.' The Bank
Holding Company Act, in a provision referred to as the Douglas
Amendment, prohibits a bank holding company from acquiring an additional
bank subsidiary located in another state unless the laws of that state
specifically allow out-of-state bank holding companies to purchase in-state
In 1982, however, the Board approved applications by two bank
holding companies to acquire failing thrift institutions.' The Board found in
each case that the public benefits of preserving the savings and loan
association "as a thrift competitor" outweighed the general adverse effects of
the combination of a bank holding company and a thrift that it had cited
in its 1977 D.H. Baldwin ruling.26
pository Institutions Act of 1982,27 which statutorily authorized bank
holding company acquisitions of failing or failed thrift institutions in
order to give the thrift deposit insurance fund ("FSLIC") greater flexibility
in dealing with failed thrifts.2" The statute established a priority scheme
to aid FSLIC in selecting among the bidders for a failed thrift. The
scheme gave priority to a bid from another thrift institution over a bid
from a bank holding company. 29 The purpose of the bidding priority
scheme is described in the statute as the maintenance of "specialized
depository institutions."" °
In approving acquisitions pursuant to this statutory authority, the
Federal Reserve Board imposed what it called "tandem operations
restrictions."3 1 These restrictions precluded cross-marketing of bank
subsidiary services to customers of the thrift subsidiary.32 These restrictions
were imposed to alleviate concerns that bank holding companies'
ownership of thrift institutions might result in unfair competition and conflicts
of interest. 33 Moreover, the Garn-St Germain Act also provided that
branches established by the thrift subsidiary of a bank holding company
could only be located where a national bank could establish and operate
a branch within that state.34
Exit Moratoriumof the Competitive Equality Banking Act of 1987
The legislative authorization of bank holding company acquisitions of
failed thrifts expired in 1985, 3 was temporarily extended several times,36
and was reinstituted on a permanent basis in the Competitive Equality
Banking Act of 1987 ("CEBA"). 37 CEBA also enacted a one-year
moratorium on the exit of thrift institutions from the FSLIC insurance fund
for the purpose of conversion to bank charters and FDIC insurance, and
acquisition by a bank holding company.38 The moratorium was enacted
to prevent bank holding companies from acquiring healthy thrift
institutions by arranging for the target thrift to convert to a bank charter so
that it could subsequently be acquired by the bank holding company as
an additional bank subsidiary.3 9 Of obvious concern to Congress was the
resulting loss of FSLIC deposit insurance premiums at a time when the
financial condition of the FSLIC deposit insurance fund was in serious
The CEBA exit moratorium
was originally set to expire in
August of 1988, but was extended for an additional year, which expired
coincident with the passage of FIRREA in August 1989.4 1
ing validity of its 1977 D.H. Baldwin ruling and in September 1987 asked
for comments on a proposed regulatory revision that would sanction the
acquisition and operation of a thrift institution by a bank holding
company as an activity that was closely related to banking and a proper
incident thereto.4 2 The Board explained that statutory changes in the
GainSt Germain Act granting thrifts more bank-like powers reduced its
concerns about regulatory conflict and diminished institutional rivalry
between commonly owned banks and thrifts.4 3
The Board also noted that
its concern about undermining the Douglas Amendment had been
lessened as more states enacted statutes permitting interstate banking
consistent with the Douglas Amendment's terms."
Before the Federal Reserve
the CEBA authority was enacted. See Ranier Bancorporation, 72 Fed. Res. Bull. 666,
38. See CEBA, supra note 37, at § 306(h), 101 Stat. 552
(codified at 12 U.S.C.A.
(repealed 1989). See generally Breyer, Thrift Rescue Bill Will Open Acquisition
Doors, Am. Banker, June 13, 1989, at 4 (prior to CEBA "a number of institutions...
applied for and completed conversions to FDIC-insured status").
39. See Doyle & DeSimone, Bank Holding Company Acquisitions of
SavingsAssociations Under FIRREA, Issues in Bank Reg., Winter 1990, at 16.
40. Heifer & Kom, supra note 26 ("The Bank Board's goal of strengthening the
FSLIC fund through bank holding company acquisitions of troubled thrifts is threatened
by the acquiror's ability to convert their subsidiary thrifts into FDIC-insured institutions
once the current moratorium on exits from the FSLIC system expires.").
41. See Pub. L. No. 100-378, § 10, 102 Stat. 889
(codified at 12 U.S.C.A. § 1730)
42. See 52 Fed. Reg. 36,041, 36,045 (1987). The Federal Reserve board subsequently
reported that over 70% of the comments that it received on its proposed regulatory
revision favored allowing bank holding companies to acquire healthy thrift institutions. See
54 Fed. Reg. 37,297, 37,298 (1989). On April 19, 1989, the Federal Reserve Board asked
for public comments on whether the tandem operations restrictions should be "retained,
modified, or removed." 54 Fed. Reg. 15,806, 15,807 (1989).
43. See 52 Fed. Reg. 36,041, 36,045 (1987); see also Broome, supra note 28, at 838-49
(urging Congress to examine the continuing validity of the D.H. Baldwin ruling, which
provides, as a general matter, that the acquisition of a thrift institution was not a proper
incident to banking and therefore not a proper activity for a bank holding company).
44. See 52 Fed. Reg. 36,041, 36,045 (1987). At the time of the D.H. Baldwin ruling,
Board issued a final rule, however, Congress passed FIRREA, which
statutorily authorized bank holding companies to acquire savings
associations pursuant to their authority to acquire nonbanking
In February and March 1989, shortly after President Bush took office,
companion bills were introduced in the Senate and House by the Bush
Administration addressing the savings and loan crisis.4 6 The House and
Senate held hearings on the Administration's bill.47 Each then passed a
different version of the original proposed legislation.48 The House and
Senate differences were worked out in a Conference Committee. 49 The
Conference Committee's bill, the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989, was passed by the House and Senate
in August, and became effective when President Bush signed it on
August 9, 1989.50
The 400-page bill made many significant changes in the regulation of
thrift institutions.5 1 A new, "politically correct," term for beleaguered
savings and loans was introduced. FIRREA defined "savings
associano states had enacted statutes enabling interstate acquisitions pursuant to the Douglas
Amendment. At the time of the proposed rulemaking, however, the Board noted that
interstate banking was "widespread." See id.
45. See FIRREA, supra note 1, § 601, 12 U.S.C. § 1843(i) (Supp. 1 1989).
46. See S.413, 101st Cong., 1st Sess. (1989); H. R. 1278, 101st Cong., 1st Sess.
47. See, e.g., FinancialInstitutions Reform, Recovery, and Enforcement Act of 1989
(H.R. 1278), Part2: Hearingson H.R. 1278 Before the Subcomm. on
FinancialInstitutions, Supervision, Regulation, and Insuranceof the House Comm. on Banking, Finance
and Urban Affairs, 101st Cong., 1st Sess. (1989); Problems of the FederalSavings and
Loan Insurance Corporation (FSLIC), Part IV. Hearings on S. 413 Before the Senate
Comm. on Banking,Housing and Urban Affairs, 101st Cong., 1st Sess. (1989); Problems
of the FederalSavings andLoan InsuranceCorporation(FSLIC), PartIII: Hearingson S.
413 Before the Senate Comm. on Banking,Housing,and Urban Affairs, 101st Cong., 1st
Sess. (1989); Administration'sPlan to Resolve the Savings & Loan Crisis: HearingsBefore
the House Comm. on Banking, Finance and Urban Affairs, 101st Cong., 1st Sess. (1989);
Problemsof the FederalSavings andLoan InsuranceCorporation(FSLIC),PartII:
Hearings on S.413 Before the Senate Comm. on Banking, Housing, and Urban Affairs, 101st
Cong., 1st Sess. (1989).
48. The Senate version passed on April 19, 1989, see 135 Cong. Rec. S4304 (daily ed.
Apr. 19, 1989), and was accompanied by S. Rep. No. 19, 101st Cong., 1st Sess. (1989).
The House version passed on June 1
, see 135 Cong. Rec. H2803 (daily ed. June 1
), and was accompanied by H.R. Rep. No. 54, 101st Cong., 1st Sess., reprinted in
1989 U.S. Code Cong. & Admin. News 86.
49. See H.R. Conf. Rep. No. 222, 101st Cong., 1st Sess. 393, reprintedin 1989 U.S.
Code Cong. & Admin. News 432.
50. 135 Cong. Rec. H5315 (daily ed.Aug. 4, 1989); 135 Cong. Rec. S10,214 (daily ed.
Aug. 4, 1989).
51. See generally Clark, Murtagh & Corcoran, Regulation of Savings Associations
Underthe FinancialInstitutionsReform, Recovery, and Enforcement Act of 1989, 45 Bus.
Law. 1013 (1990); Gail & Norton, A Decade'sJourneyFrom "Deregulation"to
"Supervisory Reregulation": The FinancialInstitutionsReform, Recovery, andEnforcement Act of
1989, 45 Bus. Law. 1103 (1990); Wittie & Laird, The FinancialInstitutionsReform,
Retions" to include federally chartered savings and loan associations and
savings banks, and state-chartered savings and loan associations5. 2 The
regulatory structure for savings associations was revamped with the
creation of the Office of Thrift Supervision ("OTS") supervised by the
Department of Treasury. 3 The deposit insurance system was also
reorganized. The FSLIC was abolished, and the Federal Deposit
Insurance Corporation ("FDIC"), which previously provided deposit
insurance only for banks, was directed to create and regulate two separate
deposit insurance funds-the Bank Insurance Fund ("BIF') to insure
the deposits of banks and the Savings Association Insurance Fund
("SAIF") to insure the deposits of savings associations that had formerly
been insured by FSLIC. 4 The RTC was also created to resolve failed
In addition to changes in the regulatory structure, FIRREA made
numerous substantive changes in the statutes regulating the activities of
savings associations in an effort to eliminate some of the problems and
abuses that may have lead to the thrift crisis.5 6 Of importance to this
Article are three FIRREA provisions relating to bank holding company
acquisitions of savings associations5. 7 First, FIRREA amended the Bank
Holding Company Act to authorize bank holding companies to purchase
healthy savings associations, a power that bank holding companies had
sought since at least 1977.58 Second, FIRREA provided a
mechanismthe so-called Oakar Amendment-by which a bank holding company
could consolidate a savings association that it purchased with one of its
existing bank subsidiaries.5 9 Third, FIRREA eliminated the bidding
scheme for failed savings associations that gave priority to other thrift
institutions over bank holding companies.'
Bank Holding Company Acquisitions of
Solvent Savings Associations
Title VI of FIRREA, referred to as the thrift acquisition enhancement
provisions, amends the Bank Holding Company Act to provide that the
Federal Reserve Board may approve an application by a bank holding
company to acquire a savings association (solvent or insolvent) as a
nonbanking subsidiary.6" The purpose of this amendment was "to attract
additional private capital to the thrift industry."6 2
The original Administration bill provided that bank holding
companies could acquire healthy thrift institutions, but not until two years after
the bill's enactment.63 This waiting period was proposed because it was
feared that bank holding companies would not bid for failed thrifts if
authorized to acquire healthy thrifts."4 Two years was thought to be a
sufficient time period to allow the government to dispose of its inventory
of failed institutions. The waiting period was eliminated, however,
because of the urgent need to attract private capital to the thrift industry.6 5
FIRREA precludes the Federal Reserve Board from imposing any
restrictions on transactions between the savings association and its holding
company affiliates, other than the general affiliate transaction restrictions
set forth in the Federal Reserve Act.6 6 The elimination of the tandem
operations restrictions on thrifts acquired by bank holding companies
was viewed as essential to fulfilling the goal of attracting bank holding
61. See FIRREA, supra note 1,at § 601(a), 12 U.S.C. § 1843(i) (Supp. 1 1989). See
generally Pringle, Thrift Acquisition Opportunitiesfor Banks and Bank Holding
Companies Under the FinancialInstitutionsReform, Recovery, and EnforcementAct of 1989, 44
Consumer Fin. L.Q. Rep. 200 (1990); Mitchell, Thrift Acquisitions After FIRREA (Part
I), N.Y.L.J. Mar. 28, 1990, at 3.
62. H.R. Conf. Rep. No. 222, supra note 49, at 422, reprinted in 1989 U.S. Code
Cong. & Admin. News at 461; accordH.R. Rep. No. 54, supra note 48, at 449, reprinted
in 1989 U.S. Code Cong. & Admin. News at 245.
63. See S. 413, 101st Cong., 1st Sess. § 601, 135 Cong. Rec. S1535 (daily ed. Feb. 22,
64. See Weiss & Stock, supra note 9 ("The two-year delay obviously is intended to
encourage bank holding companies to purchase failing thrifts rather than healthy ones, at
least during the next couple of years when there will be many sick institutions on the
65. H.R. Rep. No. 54, supra note 48, at 374-7
5, reprintedin 1989
U.S. Code Cong. &
Admin. News at 170. The House Committee's report explained that the "infusion of
private capital into the thrift industry must proceed as quickly as possible." Id. at 449,
reprintedin 1989 U.S. Code Cong. & Admin. News at 245; see 52 Banking Rep. (BNA)
863 (1989) (House Financial Institutions Supervision, Regulation, and Insurance
Subcommittee of the House Banking Committee adopted an amendment offered by Reps.
Mary Rose Oakar and Stan Parris to permit bank holding companies to acquire healthy
thrifts upon the bill's enactment); 52 Banking Rep. (BNA) 7
amendments drafted by the Administration were proposed on March 27, 1989, to allow
immediate acquisitions of savings associations)
66. See FIRREA, supra note 1,§ 601(a)(i)(2), 12 U.S.C. § 1843(i)(2) (Supp. 1 1989);
id. § 301, 12 U.S.C. § 1468 (Supp. 1 1989). The Board must remove any tandem
operations restrictions on any approvals of bank holding company acquisitions of thrift
institutions granted prior to FIRREA. Id. § 601(b), 12 U.S.C. § 1843 note (modification of
company capital to the thrift industry. The restrictions previously
imposed on bank holding companies operating failed thrifts eliminated
most possible synergies from the bank holding company-thrift
combination. Many believe these restrictions accounted for the relatively few
bank holding company acquisitions of failed thrifts since the initial
statutory authorization of such acquisitions in 1982.67 After FIRREA,
opportunities for cross-marketing of bank services to savings association
customers are available, as are opportunities to use funds from one
depository institution subsidiary to aid activities conducted in another
depository institution subsidiary.6 8
In Title II of FIRREA, Congress amended the Federal Deposit
Insurance Act to provide that, as a general matter, no savings association may
convert from the savings association deposit insurance fund (SAIF) to
the bank deposit insurance fund (BIF) during the five-year period
following the enactment of FIRREA.6 9 The deposit insurance conversion
moratorium was designed to ensure that the thrift deposit insurance fund was
not deprived of premiums from thrift institutions that might elect to
convert to a bank charter. At the end of the insurance conversion
moratorium, a savings association may convert from SAIF to BIF only upon the
payment of exit fees to SAIF and entrance fees to BIF.' °
67. See Belew, The Thrift Rescue Law Presents Vital Cross-MarketingOpportunities
J. Retail Banking, Fall 1989, at 41, 41 (prior to FIRREA "S&L[s] could not share
backoffice operations or be included in joint marketing efforts" with their bank holding
company parents. "Neither could the S&L sell products, such as credit cards, originated in
the holding company or its affiliates."); Pringle, supranote 61, at 200 ("substantial
limitations placed by the FRB on the activities... of the thrifts post-acquisition by a bank
holding company [prior to FIRREA] substantially diminished the benefits of
acquisition"); Weinstein, Results Are Mixed at Citicorp Thrifts, Am. Banker, Mar. 27, 1989, at 1
(Citicorp has been hindered by tandem operations restrictions).
68. FIRREA provides that transactions between the savings association subsidiary
and other subsidiaries of the bank holding company are limited only by the Federal
Reserve Act's affiliate transaction rules, which exclude transactions between sister banks,
including transactions between a bank subsidiary and a savings association subsidiary of
the same bank holding company. See FIRREA, supra note 1, § 301, 12 U.S.C.
§ 1468(a)(2) (Supp. 1 1989).
69. See id § 206(7), 12 U.S.C. § 1815(d)(2); H.R. Rep. No. 54, supra note 48, at
41112, reprintedin U.S. Code Cong. & Admin. News at 207-08 ("this moratorium is
necessary to insure that those institutions that have benefitted from having a savings and loan
charter pay their fair share of the bailout to provide for a stable and increased premium
income to reduce the amount of taxpayer funds ultimately needed to resolve the crisis").
70. See id § 206(7), 12 U.S.C. § 1815(d)(2)(E) & (F); 56 Fed. Reg. 29,893 (1991) (to
be codified at 12 C.F.R. § 312.2); see also Vartanian, Ansell & Rockford, Thrift
Acquisition&" Sorting Through the Deposit InsuranceConfusion, Banking L. Rev., Winter 1990,
13, 14 ("Entrance fees are intended to offset dilution to an insurance fund resulting from
an increase in deposits insured by that fund, while exit fees compensate an insurance fund
for the loss of deposits and the attendant loss of premium income derived from those
There are two exceptions to the deposit insurance conversion moratorium: (1) an
insubstantial deposit transfer, see infra text accompanying notes 100-04; and (2) a
consolidation of a bank and an insolvent savings association in an emergency acquisition, see
infra text accompanying notes 111-13.
A bank holding company that acquires a solvent savings association
pursuant to the authorization in FIRREA must conform the savings
association's activities to those permissible for a nonbanking subsidiary of a
bank holding company. 7 As a practical matter, this means that some
insurance and real estate development activities that the savings
association may have been statutorily authorized to perform by its chartering
authority may not be performed by that same savings association if it is
controlled by a bank holding company.72
The Douglas Amendment to the Bank Holding Company Act does not
limit the location of the savings association subsidiary because it only
applies to a bank holding company's acquisition of a "bank" subsidiary,
and the Bank Holding Company Act's definition of "bank" explicitly
excludes savings associations.73 Thus, a bank holding company may
acquire a savings association located in a state where it might not be able to
acquire a bank subsidiary.7 4
71. See 12 U.S.C. § 1843(c)(8) (Supp. 1 1989) (a nonbanking subsidiary of a bank
holding company may engage in those activities that the Federal Reserve Board has
found to be closely related to banking and a proper incident thereto); 12 C.F.R.
§ 225.25(b)(9) (1991); 54 Fed. Reg. 37,297, 39,300 (1989).
72. See Doyle & DeSimone, supra note 39. In this sense, a savings association owned
by a bank holding company is a hybrid thrift institution in that its thrift powers are
limited by the nonbanking limitations of the Bank Holding Company Act.
73. See 12 U.S.C. § 1842(d) (1988). "Bank," for purposes of the Bank Holding
Company Act and its Douglas Amendment, is defined to exclude an "insured institution" as
defined in section 18410). See 12 U.S.C. section 1841(c)(2)(B) (1988). An "insured
institution" includes a federally chartered savings association, federally chartered savings
bank, state savings association insured by the SAIF, and a savings bank deemed by the
OTS to be a savings association pursuant to section 1467a(l). See § 18410) (Supp. I
74. Once a bank holding company acquires a savings association, however, it becomes
a savings and loan holding company. See 12 U.S.C. § 1467a(a)(1)(D) (Supp. 1 1989).
Thus, further savings association acquisitions are subject to the geographic limitations of
the Savings and Loan Holding Company Act. See 12 U.S.C. § 1467a(e)(3) (Supp. I
1989). That Act was amended by the Competitive Equality Banking Act of 1987 to
provide a Douglas Amendment-like counterpart for the acquisitions of additional thrift
institutions. See CEBA, supra note 37, at § 104(g), 12 U.S.C. § 1467a(e)(3) (Supp. 1 1989).
Subsequent acquisitions by a bank holding company of savings associations must be
consistent with the Savings and Loan Holding Company Act and the state laws of the state
of the savings association target. See 12 U.S.C. § 1467a(e)(3) (Supp. 1 1989).
FIRREA does not expressly address the branching rights of a savings association
acquired by a bank holding company in a nonemergency acquisition. See Doyle &
DeSimone, supra note 39. The absence of any specific statutory guidance strongly
suggests that a thrift subsidiary of a bank holding company may branch to the extent that the
thrift could branch absent bank holding company ownership. Moreover, one of the
tandem operation restrictions frequently imposed by the Federal Reserve Board on
acquisitions of failed thrifts by bank holding companies prior to FIRREA was the limitation of
branches of the acquired thrift to those branches that might be established by a national
bank. The removal of the tandem operations restrictions also suggests that Congress did
not intend to limit the branching opportunities of a savings association acquired by a
bank holding company. The Federal Reserve Board's view is that "savings associations
acquired by bank holding companies [should] be permitted to branch to the extent
permitted other savings associations located in the same home state." 54 Fed. Reg. 37,297,
The Consolidationof a Savings Association and a Bank Subsidiary of a Bank Holding Company
A "major tenet" of the legislation accompanying the House Report on
FIRREA was "a commitment to maintain a separate and viable industry
charged with promoting home ownership." 75 The House Report also
identified as a "critical factor in achieving the government's housing goal
... the existence of a safe, efficient and viable thrift industry."7 6 The
Conference Committee's Report accompanying the version of the bill
that was enacted, however, set forth a more general legislative goal of
"promot[ing] through regulatory reform a safe and stable system of
affordable housing finance."77 Preservation of a separate and independent
thrift industry was not set forth as a purpose of the legislation.
This change in focus of FIRREA's purpose is also evidenced by the
Conference Committee's addition of the Oakar Amendment to the
Federal Deposit Insurance Act.7" This amendment permits a bank holding
company that acquires a savings association to consolidate the savings
association with an existing bank subsidiary of the bank holding
company.7 9 The original Administration bill did not provide for
consolidation of a solvent savings association subsidiary purchased by a bank
holding company with a bank subsidiary of the holding company.Y° The
Administration apparently believed that the five-year deposit insurance
conversion moratorium prevented charter conversions as well as
insurance fund conversions.
Given the potential significance of the Oakar Amendment, it is
interesting that it entered into the FIRREA legislation during the Conference
Committee deliberations, late in the legislative process, and with little
attention." The Amendment was neither described in nor commented
upon in the Conference Committee report.8 2 Although the trade press
was aware of the Oakar Amendment's consideration and gave it some
coverage,83 it is nonetheless highly unlikely that many Congressmen
understood that it was included in FIRREA or realized the scope of its
The purpose of the Oakar Amendment was to attract more capital to
thrifts from bank holding companies by allowing bank holding company
acquirors to gain the operational efficiencies of combining the thrift
assets and deposits with those of an existing bank subsidiary. 5
Representative Oakar described her amendment as one that would benefit the
government by encouraging bank holding companies to purchase thrifts,
which might fail and have to be disposed of at government expense if
they were not purchased. s6 Thus, the purpose of the Oakar Amendment
seems consistent with the general purpose of the thrift acquisition
enhancement provisions to attract bank holding company capital to savings
Although the basic premise of the five-year moratorium on deposit
inAmendment--could be added to the bill with little debate among [Conference]
committee members"). The Oakar Amendment was drafted with the assistance of a bank
holding company trade group and a law firm assisting it in its efforts. See Doyle & DeSimone,
supra note 39 ("Arnold & Porter and The Secura Group participated with several bank
holding companies and the Coalition of Regional Banks in the drafting of what ultimately
became the Oakar Amendment."); Rehm, Farmer,FitzgeraldAre Main Boosters ofOakar
Proposal,Am. Banker, Aug. 10, 1989, at 4. Although the amendment was not proposed
until the Conference Committee's deliberations, Representative Oakar indicated that she
had worked on the amendment for some six months. Id.
82. See H.R. Conf. Rep. No. 222, supra note 49, reprintedin 1989 U.S. Code Cong. &
Admin. News at 432.
83. See, e.g., Garsson, supra note 81, at 1.
84. As Representative Shumway commented,
the conference turned out to be a fiasco. The Members had very little input in
the decisions that were made there. Many things were inserted by staff without
contemplation or discussion at all, and even to this day I think there were many
of us who served on that conference who do not know what is contained in the
conference report, and we have not had a chance to see it or review the notes of
135 Cong. Rec. H4966 (daily ed. Aug. 3, 1989); see also 135 Cong. H5003 (daily ed. Aug.
3, 1989) (statement of Rep. Bunning) ("I didn't sign the Conference Report, because... I
didn't get the chance to participate. One hundred two conferees were appointed and no
progress was made until the 4 principals went behind closed doors.").
85. See 135 Cong. Rec. H4970 (daily ed. Aug. 3, 1989) (statement of Rep. Oakar).
The purpose of the Oakar Amendment is to "provide much-needed incentives for the
banking industry to consider acquisitions of thrifts, which in our recent memory, they
have not been inclined to do." Id. The amendment's incentive is the "ability to
consolidate a savings association into an existing bank subsidiary that produces cost efficiencies
which can make the acquisition viable in bottomline terms." Id.; see also 135 Cong. Rec.
H4986 (daily ed. Aug. 3, 1989) (statement of Rep. Hiler) ("To stimulate investment [in
thrifts] by bank holding companies, the bill encourages the integration of acquired thrifts
into the holding company operations."); Garsson, supra note 81 (absent the Oakar
Amendment, "'banks saw no benefits to buying thrifts' ") (quoting a lobbyist for The
86. See 135 Cong. Rec. H4970 (daily ed. Aug. 3, 1989) (statement of Rep. Oakar).
surance fund conversions was maintained in FIRREA, the Oakar
Amendment permits charter conversions on the condition that the bank
into which the savings association is merged pays federal deposit
insurance premiums to both BIF and SAI. 7 The deposit insurance
premium amounts are allocated on the basis of a formula provided in the
statute for deposit insurance assessments by SAIF on deposits
attributable to the former savings association."8 Upon the expiration of the
fiveyear insurance conversion moratorium, the bank may convert the former
savings association's deposits to BIF insurance upon the payment of exit
and entrance fees for the deposits converted from SAIF to BIF.s9 It thus
appears that Congress, in enacting the insurance conversion moratorium,
while allowing the Oakar consolidation of a savings association and a
bank, was concerned with protecting the financial integrity of the SAIF
deposit insurance fund rather than with preservation of a separate and
independent thrift industry.' °
The Oakar Amendment contains several other conditions in addition
to the required allocation of deposit insurance premiums between SAIF
and BIF.9 1 The Oakar combination must be approved by the federal
banking agency charged with supervision of the resulting bank and by
87. See FIRREA, supra note 1, § 206(a)(7), 12 U.S.C. § 1815(d)(3)(B) (Supp. I 1989).
88. See id. § 206(a)(7), 12 U.S.C. § 1815(d)(3)(C). Essentially, the resulting bank
pays SAIF insurance on the savings association's deposits, which are assumed to grow at
a rate equal to the greater of seven percent annual growth or the annual rate of growth of
deposits of the subsidiary bank minus the amount of any deposits acquired through the
merger process. See hL The deposit amount is adjusted twice a year for computation of
deposit insurance premiums. This aspect of the Oakar Amendment has been criticized
because it assumes a seven percent minimum annual growth rate of the savings
association's deposits. In reality, many savings associations may have declining deposits. Part
of the impetus behind this assumed rate of deposit growth may have been to guarantee
the SAIF insurance fund an expanding assessment base. See Garsson,supra note 81, at I.
89. See FIRREA, supra note 1, § 206(a)(7), 12 U.S.C. § 1815(d)(3)(G) (Supp. I
1989). "Entrance fees are intended to offset dilution to an insurance fund resulting from
an increase in deposits insured by that fund, while exit fees compensate an insurance fund
for the loss of deposits and the attendant loss of premium income derived from those
deposits." Vartanian, Ansell & Rockford, supra note 70, at 14.
90. See 135 Cong. Rec. H4971 (daily ed. Aug. 3, 1989) (statement of Rep. Oakar)
(pointing out that no deposit insurance premiums would be removed from SAIF as the
result of a thrift's consolidation with a bank pursuant to the Oakar Amendment).
91. The bank resulting from the merger of the savings association into the bank
subsidiary has the powers accorded by the bank's chartering authority. See Doyle &
DeSimone, supra note 39. But see 56 Fed. Reg. 20,520 (1991) (to be codified at 12 C.F.R
§ 333.33) (The FDIC issued a final rule that savings associations that convert to
SAIFmember state banks are subject to various regulatory restrictions imposed upon savings
associations in FIRREA. It is not clear whether the FDIC intends to apply this new rule
to state banks resulting from Oakar transactions that pay deposit insurance premiums to
both BIF and SAIF. In any event, saving associations consolidating with national banks
are not subject to the rule.).
The bank's location must be consistent with the Douglas Amendment, and unless the
savings association was acquired by the bank holding company in an emergency
acquisition, see infra note 111, the branches of the bank subsidiary must comply with
appropriate state or federal bank branching restrictions. See 135 Cong. Rec. S10,200 (daily ed.
Aug. 4, 1989) (statement of Sen. Wirth) (banks that result from a conversion transaction
the Federal Reserve Board. 92 In addition, the Oakar Amendment
provides that the Federal Reserve Board may not approve the merger unless
at the time of the proposed transaction the aggregate amount of the
assets of all depository institution subsidiaries of the acquiring bank
holding company is not less than 200 percent of the total assets of the target
savings association. 9a Upon consummation of the proposed transaction,
the bank holding company and all bank subsidiaries of the bank holding
company must meet all applicable capital standards.9 4 The transaction
must not be in substance the acquisition of a BIF member bank by a
SAIF member bank.95 Finally, the proposed transaction must comply
with the Douglas Amendment to the Bank Holding Company Act,
assuming that at the time of the transaction the savings association is a
state bank that the bank holding company wishes to acquire. 96 The
Conference Committee's report offers no explanation of these conditions.
Prior to August 9, 1991, a bank holding company could not enter into
an Oakar transaction with a savings association having tangible capital of
more than five percent during the preceding quarter.97 The Conference
may not retain branches that violate state branching laws); 135 Cong. Rec. H4980 (daily
ed. Aug. 3, 1989) (statement of Rep. Leach) (same).
92. See FIRREA, supra note 1, § 206(a)(7), 12 U.S.C. § 1815(d)(3)(A) (Supp. I
1989). If a state-chartered institution is involved in an Oakar consolidation, the approval
of the appropriate state regulatory authority is also necessary. See Doyle & DeSimone,
supra note 39.
93. See 12 U.S.C. § 1815(d)(3)(E)(i) (Supp. 1 1989). This provision was added to
Rep. Oakar's original proposal by congressional staffers. See Rehm, supra note 81. The
Federal Reserve Board staff may allow the bank holding company to include the assets of
the savings association to be acquired in determining if this test is met, thus permitting a
bank holding company to consider acquiring a larger savings association than might
otherwise be possible. See Doyle & DeSimone, supra note 39. "The practical result of
this methodology is that the holding company's pre-transaction depository institution
subsidiary need only be greater in size by $1 than the savings institution to be acquired."
J. Williams, Savings Institutions: Mergers, Acquisitions and Conversions § 12.01(4].
94. See 12 U.S.C. § 1815(d)(3)(E)(ii) (Supp. 1 1989).
95. See id. § 1815(d)(3)(E)(iii). The purpose of this requirement may be to ensure
that the resulting entity does not retain certain advantages of the savings association
charter, such as savings association branching rights. See Doyle & DeSimone, supra note
96. See 12 U.S.C. § 1815(d)(3)(E)(v) (Supp. 1 1989).
97. See id. § 1815(d)(3)(E)(iv)(IU). For transactions that occurred during the
oneyear period prior to August 9, 1990, the statute provides that the savings association must
have tangible capital of less than four percent during the preceding quarter. See id. at
§ 1815(d)(3)(E)(iv)(I). The capital limitation provisions were added to Rep. Oakar's
proposal by congressional staffers. See Rehm, supra note 81
The Federal Reserve Board has interpreted the capital test as applying to the quarter
immediately preceding the savings association's acquisition by a bank holding company,
rather than to the quarter preceding the actual merger of the savings association into an
existing bank subsidiary. See J. Williams, supra note 93, § 12.01; Doyle & DeSimone,
supra note 39. Thus, bank holding companies that purchased savings associations prior
to FIRREA and then capitalized them at six percent of assets pursuant to Federal
Reserve Board requirements were still eligible to merge the savings associations into an
existing bank subsidiary prior to August 1, 1991. See Doyle & Simone, supra note 39.
After FIRREA's passage, Representative Oakar attempted to clarify the meaning of
"during the preceding quarter" by entering into the Congressional Record an
interpretaCommittee may have inserted this provision so that for at least the first
two years following FIRREA's enactment bank holding companies
would concentrate their acquisition and consolidation efforts on thrifts
with weaker capital positions. The thrift acquisition enhancement
provisions contain no capital limitations, however, so that a bank holding
company could acquire any savings association and hold it as a separate
nonbanking subsidiary until August 9, 1991, at which time the Oakar
consolidation could take place upon the expiration of its capital
Other FIRREA Provisions
1. The Sasser Amendment: The Conversion of a Savings Association
Subsidiary to a Bank Charter
In a provision commonly referred to as the Sasser Amendment,
FIRREA provides tht the deposit insurance conversion moratorium should
not be construed as prohibiting a savings association with SAIF deposit
insurance from converting to a bank charter during the five-year
moratorium period, so long as the resulting bank retains SAIF deposit
insurance.9" At the end of the five-year deposit insurance conversion
moratorium, it would be possible for the resulting bank to convert from
SAIF to BIF insurance upon payment of the appropriate exit and
entrance fees.9 9 This provision also evidences congressional concern with
tion similar to that of the Federal Reserve Board, suggesting that "[a]ny contrary result
would unfairly penalize those institutions whose capital positions had been improved
after acquisition, and indeed would encourage acquirers not to improve the thrift's tangible
capital position." 135 Cong. Rec. E3, 219-20 (daily ed. Sept. 28, 1989). The OT has
interpreted "the preceding quarter" to refer to the quarter preceding the combination of
the savings association with the bank subsidiary of the bank holding company. See J.
Williams, supra note 93, § 12.01.
98. See 12 U.S.C. § 1815(d)(2)(G) (Supp. 1 1989). The Sasser Amendment is not
viewed as affirmative authority for the thrift-to-bank charter conversion. Independent
authority and approval for that charter conversion must be obtained under appropriate
state or federal law.
The powers of a savings association that converts to a bank charter would presumably
be commensurate with those powers granted by the bank chartering authority. A recent
FDIC regulation, however, provides that a SAIF-member state bank resulting from a
savings association conversion remains subject to various regulatory restrictions on
savings associations provided for in FIRREA. See 56 Fed. Reg. 20,520 (1991) (to be
codified at 12 C.F.R § 333.33). Savings associations converting to national banks, however,
are not covered by the new FDIC rule because "national banks operate under a federally
legislated scheme that subjects them (with only minor exceptions) to the same, if not
more stringent, restrictions that would be imposed by the regulation." IM at 20,525.
The location of a savings association converted to a bank is subject to the Douglas
Amendment to the Bank Holding Company Act. See 12 U.S.C. § 1842(d) (1988). Bank
branching restrictions are applicable rather than the sometimes more liberal thrift
branching restrictions. Unless the savings association was originally acquired by the
bank holding company in an emergency acquisition, once it converts to a bank charter it
must divest any branches that would be inappropriate for that bank to operate under
applicable state or federal law.
99. See 12 U.S.C. §§ 1815(d)(2)(A)(ii), (d)(2)(E) & (d)(2)(G) (Supp. 1 1989).
the financial integrity of SAIF rather than with the continued livelihood
of the thrift charter. The advantage of the Sasser Amendment is that a
bank holding company need not operate a thrift institution and may
benefit from the public's perception of the stronger bank charter. Because
the operations of the former savings association are not consolidated with
an existing bank subsidiary, as in an Oakar transaction, the cost savings
realized as a result of the ownership of the former savings association
may be substantially less than in an Oakar consolidation.
A portion of the deposits of a savings association may be consolidated
with a bank's deposits in an insubstantial deposit transfer. This type of
transaction is established in FIRREA as an exception to the five-year
deposit insurance conversion moratorium. 1" Notwithstanding the
moratorium, the FDIC is directed to approve a deposit insurance conversion
from SAIF to BIF if the conversion transaction affects only an
"insubstantial portion.., of the total deposits of each depository institution
participating in the conversion transaction." 10 1 The statute provides that
a conversion transaction shall be deemed to affect an insubstantial
portion of the total deposits of a depository institution if the aggregate
amount of all deposits transferred in such transaction and in all
conversion transactions occurring after FIRREA's enactment is less than 35
percent of the institution's deposits.' 2 Upon conversion of insurance
funds, exit and entrance fees must be paid to SAIF and BIF.1 3 It is
possible that this provision was included in recognition of the fact that
thrifts might need a way to sell a portion of their deposits (including an
entire branch) in order to raise capital to meet the higher capital
standards imposed by FIRREA. 4
The Emergency Acquisition of an Insolvent Savings Association by
a Bank Holding Company
FIRREA moved the thrift emergency acquisition provisions added by
the Gam-St. Germain Act of 1982 from the National Housing Act to the
Federal Deposit Insurance Act' 05 It also made certain other technical
and definitional changes to the previous law. The Garn-St Germain
Act's statutory scheme that gave priority to bids from similar types of
institutions located in the same state as the thrift target was eliminated in
favor of priority for the lowest cost bid." 6 Neither the Conference
Committee's Report nor the House Banking Committee's Report contains
any explanation of the reasons the bidding priority scheme was
eliminated.1 °7 This change, however, is also consistent with the view that
Congress abandoned the goal of maintaining thrifts as a specialized form
of depository institution in favor of resolving insolvent thrift institutions
at the least cost to the government.108
FIRREA authorizes a bank holding company to acquire control of a
savings association in an emergency acquisition if the FDIC determines
that the acquisition will not present a substantial risk to the safety or
soundness of the savings association or the company acquiring it."
Deposit insurance for the savings association subsidiary is provided by
SAIF. The savings association must not conduct any activities that are
not permissible for a nonbanking subsidiary of a bank holding
comtalized thrift to increase its capital ratio to comply with the new capital requirements
established by FIRREA through the sale of their branches to commercial banks." Id.
105. See FIRREA, supra note 1, § 217(8), 12 U.S.C. § 1823(k) (Supp. 1 1989); see
generally Zisman & Churchill, supra note 4.
106. See FIRREA, supra note 1, § 217(8), 12 U.S.C. § 1823(k) (Supp. 1 1989); H.R.
Rep. No. 54, supranote 48, at 336, reprintedin 1989 U.S. Code Cong. & Admin. News at
132 (eliminating the bidding preference and requiring the FDIC to give consideration to
the need to minimize the cost of financial assistance).
107. See H.R. Conf. Rep. No. 222, supra note 49, at 398, reprintedin 1989 U.S. Code
Cong. & Admin. News at 437. FIRREA "remove[s] the procedures under current law
that give priority to in-State thrift acquirers of failing thrifts. The acquisition of failing
thrifts by banks or bank holding companies is authorized." Id.; see also H.R. Rep. No.
54,supra note 48, at 336, reprintedin 1989 U.S. Code Cong. & Admin. News at 132 (The
House Report stated that "[p]rovisions of former section 408(m) establishing preferences
in approving applications to acquire a failing institution based on the location of the
applicant and the type of applicant are deleted. The FDIC is required to give
consideration to the need to minimize the cost of financial assistance.").
108. See supra text accompanying notes 75-77.
109. See FIRREA, supra note 1, § 217(8), 12 U.S.C. § 1823(k)()(A)(i)(III) (Supp. I
1989) (FDIC authorized to approve an emergency acquisition or merger of a savings
association, even if the acquisition or merger would otherwise violate state law, if the
FDIC determines in its discretion that the acquisition would lessen the risk to the FDIC).
The savings association subsidiary may retain its existing branches even if such branch
locations would not be permissible for a similarly situated bank subsidiary. See 12 U.S.C.
§ 1823(k)(4)(A) (Supp. 1 1989). Moreover, the savings association subsidiary is
specifically authorized to establish and operate new branches to the same extent as any savings
association that is not affiliated with a bank holding company and the home office of
which is located in the same state as the bank holding company. See id
such a savings association acquisition are even more pronounced when
the acquired savings association is consolidated with an existing bank
subsidiary pursuant to the Oakar Amendment.' 3 1
Savings associations that are still mutual institutions owned by their
depositors rather than by stockholders are an especially cheap source of
additional market share that many bank holding companies may have
neglected until now. 132
Although a number of thrifts converted from
mutual to stockholder-owned status in the 1980s, over one-half of all
savings associations are still mutual in form. 13 3 Mutual thrifts generally
sell at forty-five to fifty-five percent of their pro forma book value, while
stockholder-owned institutions typically sell at prices ranging only
somewhat below book value to premiums of up to thirty percent above book
value.M This price disparity between mutual and stock institutions is
explained by the absence of a control premium for a mutual institution.
A merger-conversion of a mutual savings association may be
effectuated by the conversion of the mutual institution into a
stockholderowned savings association and its simultaneous merger into a bank
subsidiary of a bank holding company pursuant to the Oakar Amendment.
The stock that is issued to the mutual's depositors who elect to subscribe
to the stock issuance is bank holding company stock. 135
merger-conversions of mutual thrifts are extremely attractive from a
bank holding company's standpoint, there are several potential problems
in consummating such transactions. The management of the mutual
inreinvestment of 10% of a thrift's mortgage assets into consumer or commercial loans
might increase the institution's after-tax return on assets).
131. Moore & Murphy, supra note 115, at 25.
132. See Bush, supranote 124, at 32; Vartanian, Ansell & Rockford, supra note 70, at
16 n.2 ("[The acquisition can be completed with a limited out-of-pocket cost; Le., there
are no shareholders to pay .... [A] merger conversion may be viewed both as a means of
expanding market presence and of increasing capital."); Marks, Merger-Conversion a
Profitable Way to Acquire a Healthy Mutual Thrift, Am. Banker, Aug. 8, 1990, at 26
("Merger-conversions are very attractive economically to acquirors, so much so that the
only question is why more banks and thrifts aren't using this vehicle." From the
standpoint of the bank holding company acquiror, "the stock offering is usually at the
prevailing market price and the gross proceeds are usually about the same as the thrift's equity,
the deal is almost always antidilutive to existing shareholder equity.").
133. See Moore & Murphy, supra, note 115, at 30.
134. See id.
135. A mutual institution converts to stock form and the bank holding company
acquires all of the capital stock of the converted savings association. The depositors are
given subscription rights to purchase bank holding company stock (instead of savings
association stock) in an amount equal to the appraised value of the savings association.
Stock that is not sold to deposit account holders is sold to the public either in a direct
community offering or in an underwritten public offering. See 12 C.F.R. § 563b.10
(1991) (dealing with the conversion of a savings association in connection with an
acquisition by an existing holding company and the conversion of a savings association
through a merger with an existing stock savings association); OTS Chief Counsel
Opinion, No. 90/CC-12 (Nov. 26, 199) [Current] Fed'l Banking L. Rep. (CCH) 82,459
(describing an Oakar consolidation involving a mutual savings association); Doyle &
DeSimone, supra note 39. The percentage of depositors subscribing to the stock issuance
is usually small.
stitution controls the decision of whether to undertake the
merger-conversion, and controls the selection of the acquiring bank holding
company. 136 There are no shareholders to consider whether a sale of
stock in response to a bank holding company purchase offer is an
economically favorable transaction. While shareholders of an existing
stockholder-owned thrift may be willing to entertain a stock purchase offer
from a bank holding company that will result in their economic gain, it is
the management of a mutual thrift that must be convinced that the
p1ro37posed merger-conversion will benefit the institution and its depositors.
Furthermore, recognizing the disparities in book value at which a mutual
thrift is sold compared to a stock thrift, the mutual's management may
deem it advisable for the mutual to effect a conversion to
stockholderowned status at less than book value and then to sell to a bank holding
company at book value or at a premium over book value, so that the
mutual's depositors who subscribe to the stock issuance gain the benefit
of the c13o8ntrol premium rather than the bank holding company
Another source of deposits at economical prices are savings
associations for sale by the RTC. In many cases the RTC sells thrift institutions
at very small premiums over core deposits. 39 Further, the RTC reduces
the potential risk of insolvent thrift acquisitions by offering generous
putback options that permit the acquirer to sell back to the RTC assets that
do not meet the acquirer's expectations. "o
A bank holding company-savings association combination benefits the
savings association as well as the bank holding company. A savings
association may be willing to entertain a bank holding company's acquisition
proposal for a number of reasons, including the desire of the shareholders
of a stock savings association to profit by selling their thrift stock to a
bank holding company at a price that will result in their economic gain.
Regulatory changes made in FIRREA also make a bank holding
company acquisition attractive from the point of view of a savings
association. Many thrifts may need the infusion of capital to be provided by the
bank holding company acquirer to meet FIRREA's more stringent
capi136. See Moore & Murphy, supra note 115, at 31.
137. See id. at 31-32 (given the bargaining power of the management of a mutual thrift,
they may usually negotiate "[m]ore attractive employment contracts and benefits and
higher-than-normal representation on the acquiror's board of directors or in
management"); Marks, supra note 132, at 26 (the mutual's management may "negotiate some
degree of independence, favorable compensation, or job guarantees").
138. See Moore & Murphy, supra note 115, at 31. OTS regulations restrict the transfer
of control during the first three years after a mutual converts to a stock institution.
139. See Marks, Industry ConsolidationProgressesas More Banks Buy S&L Deposits
Am. Banker, Nov. 18, 1990, at 17
("Ratios of premiums to core deposits in RTC
transactions have averaged 2.54% since resolutions were initiated in September 1989")
text accompanying notes 4-7.
140. See Marks, supra note 139, at 17 ("The ratio of premium to core deposits on an
RTC deal, however, can be as low as zero, with complete put-back options on assets
transferred with the deposits."); supra text accompanying note 7.
tal requirements."' In today's economic climate, alternative methods of
increasing capital, such as selling additional stock or increasing retained
earnings, may not be feasible for thrift institutions.' 4 2 Thus, selling to a
bank holding company or downsizing by selling branches to a bank
holding company may be the only practical ways for a savings association to
satisfy the increased capital requirements. 4 3
FIRREA also subjects savings associations to new regulatory burdens,
including an expanded qualified thrift lender test.'" If the required
concentration in mortgage-related assets is not possible or profitable, a
consent to an acquisition by a bank holding
company and merge into a subsidiary bank where its depositors' funds
may be put to less restricted and more productive uses.'4 '
Most bank holding companies have acquired savings associations
located in the markets served by their existing bank subsidiaries.'"
consolidation of the savings association subsidiary into an existing bank
subsidiary is, as Representative Oakar predicted, an attractive vehicle for
maximizing operational efficiencies and cost reductions.' 4 In addition,
the resulting bank entity has the benefit of the public's more favorable
141. See FIRREA, supra note 1, § 301, 12 U.S.C. § 1464(t) (Supp. 1 1989); Bush,
supra note 124, at 31; Moore & Murphy, supra note 115, at 22 ("Higher capital
requirements will cause many thrifts to seek merger partners"); Marks, supra note 139, at 17; see
alsoClark, Murtagh & Corcoran, supra note 51, at 1034-65 (for an extensive discussion of
FIRREA's capital requirements for savings associations).
142. See generally MacRae, supra note 8, at 31-34 (discussing alternative methods of
increasing thrift capital).
143. See, e.g., Stein, supra note 100, at 1011; Nagle, Branch Sales Will Escalate As
ConsolidationProceeds, Am. Banker, Feb. 27, 1991, at 13 ("Inadequately capitalized
institutions have the most obvious rationale for selling branches: to decrease the balance
sheet by the amount of deposits sold and to enhance the equity by the premium received
on the deposit sale."); Marks, supra note 139 ("branch sales offer the easiest way for
thrifts to downsize and build their capital ratios").
144. FIRREA raised the percentage of assets that a thrift must devote to home
mortgage lending from 60% to 70%, effective July 1, 1991, and narrowed the types of assets
that might be counted. See FIRREA, supra note 1, § 303(a), 12 U.S.C. § 1467a(m)
(Supp. 1 1989); 56 Fed. Reg. 19,318 (1991) (to be codified at 12 C.F.R. § 563); see also
Clark, Murtagh & Corcoran, supra note 51, at 1065-74 (discussing FIRREA's QTL
145. See Moore & Murphy, supra note 115, at 27.
146. See, e.g., Huggins, Don't Just Kick the Tires, ABA Banking J., December 1989, at
34 ("the most successful acquisitions are intr-market... because of the cost savings and
'synergies' it makes possible"); Matthews, supra note 126, at 21
("Nearly all the thrift
deals struck in 1989 were used by banks as a means of filling in gaps in their franchises,
rather than as extensions of their markets.")
; see also Moore & Murphy, supra note 115,
at 24 ("Most analysts agree that intramarket acquisitions have a better chance of success"
than out-of-market acquisitions.).
147. See, eg., Bush, supra note 124, at 32 ("Banks get to eat their cake and have it, too
- acquiring savings institutions, converting them to banks and avoiding the exit/entry
fee - by use of the Oakar amendment."); Moore & Murphy, supra note 115, at 25
(integration of an acquired thrift into a bank subsidiary "offers the greatest opportunities for
perception of a bank charter than of a thrift charter. 148 It is not
surprising, therefore, that over one-half of the Federal Reserve Board approvals
of savings association acquisitions by bank holding companies have been
of transactions structured pursuant to the Oakar Amendment, wherein
the acquired savings association is consolidated with a bank subsidiary of
the bank holding company. 149
The Oakar structure has been creatively utilized to structure thrift
branch purchases and purchases from the RTC, although FIRREA
provides alternative methods to structure these transactions. For instance, a
variation on the Oakar transaction, called an "Oakarized branch
purchase," has been developed, in which an insubstantial portion of the
deposits of a savings association are purchased by a bank holding
company, initially placed in a new thrift subsidiary, and are then merged into
a bank subsidiary. 50 It is likely, however, that the Conference
Committee expected branch purchases to be accomplished through the vehicle of
the insubstantial deposit transfer.' 5 ' When FIRREA was enacted, the
obvious advantage of that statutory structure was an exception from the
deposit insurance conversion moratorium so that the insubstantial
depos148. Banks "enjoy a better public image" than thrift institutions. See Moore &
Murphy, supra note 115, at 26.
149. See, e.g., Mid Am, Inc., 76 Fed. Res. Bull. 962, 962 (1990) (bank holding
company to purchase state-chartered savings association and merge it into its national bank
subsidiary); Norwest Corp., 76 Fed. Res. Bull. 873, 873-74 (1990) (mutual federal savings
bank converted to stock, converted to a national bank and merged into an existing
national bank subsidiary of a bank holding company; Board found that use of the interim
national bank to accommodate the appropriate merger statutes did not cause the
transaction to fall outside of the Oakar amendment); Ida Grove Bancshares, Inc., 76 Fed. Res.
Bull. 693, 693 (1990) (state bank subsidiary to purchase assets and assume liabilities of
state savings association that was established by bank holding company to purchase
assets and assume liabilities of federal savings association).
Most of the remaining approvals have been of bank holding company acquisitions of a
savings association to be operated as a nonbanking subsidiary of the bank holding
company. See South Carolina Nat'l Corp., 76 Fed. Res. Bull. 1060 (1990); Bancorp Hawaii,
Inc., 76 Fed. Res. Bull. 759 (1990); see also First Banks, Inc., 76 Fed. Res. Bull. 669
(1990) (target will convert from mutual to stock form); National City Corp., 76 Fed. Res.
Bull. 77 (1990) (target will convert from mutual to stock form). At the time of these
acquisitions an Oakar transaction may not have been possible if the tangible capital of the
target savings association was above the statutory capital amounts set forth in 12 U.S.C.
§ 1815(d)(3)(E)(iv) (Supp. 1 1989).
The Sasser amendment, which permits a bank holding company to convert an acquired
thrift to a bank charter, has been used rarely. See Barnett Banks, Inc., 76 Fed. Res. Bull.
68 (1990) (application to acquire a bank that is successor to Barnett's existing thrift
subsidiary which intends to convert from a federal savings bank charter to a state savings
association charter and then to a state commercial bank charter).
150. See OTS Chief Counsel Opinion No. 90/CC-3 (Dec. 20, 1990), [Current] Fed'l
Banking L. Rep. (CCH) 82,467 (cross-industry branch purchase and sale transaction
and deposit transfer fees); Grady, supra note 101 (the 35% limitation on insubstantial
deposit transfers and the Oakar Amendment requirements must be met in an
insubstantial deposit transfer); NCNB Corp., 77 Fed. Res. Bull. 119 (1991); Merchants Capital
Corp., 76 Fed. Res. Bull. 695 (1990).
151. See FIRREA, supra note 1, § 206(a)(7), 12 U.S.C. § 1815(d)(2)(C)(i); (d)(2)(D)
(Supp. 1 1989); supra text accompanying notes 100-04.
its purchased from the savings association could be immediately
converted from SAIF to BIF insurance upon the payment of the appropriate
exit and entrance fees.15 2 At that time, the insurance charge on
BIFinsured deposits was only 8.5 cents per $100 of deposits, while the charge
for SAIF-insured deposits was 20.8 cents per $100 of deposits. 153
Since the differential between the deposit insurance premiums assessed
by the SAIF and BIF funds has been eliminated, the automatic
conversion from SAIF to BIF premiums has become a monetary liability,
rather than a monetary advantage, because an immediate payment of exit
and entrance fees is required to effect the deposit insurance fund
conversion. " In an Oakarized branch transfer, however, SAIF deposit
insurance is maintained on the portion of the bank's deposits attributed to the
former savings association, and because there is no insurance fund
conversion, exit and entrance fees are not assessed.15 5
The Oakar structure has also been the preferred method of purchasing
insolvent thrifts or thrift branches from the RTC.' 56 Again, the
Conference Committee probably anticipated that bank holding companies
would utilize the consolidation provision for emergency acquisitions157
and take advantage of the exception provided to the deposit insurance
conversion moratorium to convert the savings association deposits from
SAIF to BIF insurance."' 8 The Oakar Amendment is popular in
structuring RTC acquisitions for the same reasons that the Oakarized branch
transfer is preferred over the insubstantial deposit transfer provision.
Exit and entrance fees may be avoided in an Oakar transaction because
there is no deposit insurance fund conversion.
The addition of the Oakar Amendment to FIRREA leaves few reasons
or incentives for a bank holding company to continue to operate its
newly acquired thrift subsidiary as a separate entity.' 59 The most
substantial current drawback to consolidating a thrift subsidiary into a bank
subsidiary, however, is the cost of the recapture of the savings
association's bad debt reserve when it converts into a bank."W Thrift
institutions may deduct a portion of their earnings from their taxable income
and place those funds in a bad debt reserve on which they pay no income
taxes."' At the time a thrift institution ends its thrift status and is
consolidated into a bank, however, this bad debt reserve must be taken into
income. 162 The resulting bank incurs an immediate tax liability, which
may amount to a substantial portion of the former thrift's net worth. 163
The cost of consolidating a thrift into a bank in an Oakar transaction
must, therefore, include the potential tax liability from the recaptured
bad debt reserve.
A separate savings association subsidiary of a bank holding company
is also subject to the Bank Holding Company Act's limitations on
nonbanking activities. 16 Thus, the bank holding company loses many of the
advantages of maintaining a separate thrift charter if additional activities,
such as insurance and real estate, that could be conducted by a thrift are
nevertheless prohibited for a thrift owned by a bank holding company.' 6
A traditional advantage of maintaining a separate subsidiary-liability
limitation-may not be available for commonly controlled depository
institutions. FIRREA amended the Federal Deposit Insurance Act to
provide that each depository institution subsidiary of a holding company
guarantees the FDIC for any losses suffered by any commonly controlled
depository institutions. 6 6 Thus, the cross-guarantee provision eliminates
the advantage of maintaining a separate thrift subsidiary for the purpose
of insulating that subsidiary's losses from the assets of other commonly
controlled depository institution subsidiaries.' 67 If the assets of all
pository institutions can be used to cover the losses suffered by the FDIC
with respect to any single depository institution subsidiary, the
depository institution subsidiaries may as well be operated as branches of a
single bank subsidiary. 6 '
Some bank holding companies that have maintained the acquired
savings association as a separate subsidiary may only be doing so
temporarily, planning to merge the thrift into a bank subsidiary upon the August
1991 expiration of the Oakar capital limitations, which previously
restricted Oakar transactions to savings associations with tangible capital
less than five percent.1 69
In some instances a bank holding company may maintain a separate
savings association subsidiary to avoid the application of the Douglas
Amendment or bank branching limitations. Citicorp, for example, owns
thrift subsidiaries in states that would not allow a New York bank
holding company to own a bank in those states.17 0 As interstate banking
restrictions are liberalized or lifted, however, this reason for maintaining a
separate thrift subsidiary becomes less important.
In many states, thrifts are afforded more liberal intrastate branching
rights than banks, 1 71 and a thrift subsidiary maintained in that form
could take advantage of those greater branching possibilities. 7 2 The
Deposit Guaranty decision has removed much of the force of that
advantage.17 3 The United States Court of Appeals for the Fifth Circuit ruled
in that case that national banks could branch to the same extent as
statechartered banks, including state-chartered thrifts, so long as the state
thrift could be said to be "carrying on the business of banking."'7 4 Many
states have amended their state bank branching laws to permit branching
by state banks to the same extent that the state permits a state-chartered
thrift to branch so that state banks will not be disadvantaged vis-a-vis
their national bank competitors. 175
The Eighth and Tenth Circuits recently upheld an RTC regulation
that provides that the branching advantages that a thrift may have over a
commercial bank competitor may be retained by a bank subsidiary into
the cross-guarantee provision is the chilling effect it will have on interstate acquisitions"
in which a multi-bank holding company structure must be used).
168. Golembe, Government and Banking:. The ChangingRelationship, Issues in Bank
Reg., Summer 1989, at 11.
169. See 12 U.S.C. § 1815(d)(3)(E)iv)(II) (Supp. 1 1989).
170. See Weinstein, supra note 67.
171. See Broome, supra note 28, at 812. "One possible explanation for the disparity in
branching privileges many states have granted to the different types of depository
institutions may be that federal regulations provide that federally chartered thrifts may branch
freely throughout a state and, in some circumstances, across state lines." Id. at 812
172. See generally id at 808-19.
173. See Department of Banking and Consumer Fin. v. Clarke, 809 F.2d 266 (5th
Cir.), cert denied, 107 S. Ct. 3240 (1987).
174. Id at 270 (quoting 12 U.S.C. § 36(h)).
175. See Broome, supra note 28, at 851 & n.372.
which an acquired thrift is merged if the bank holding company acquired
the insolvent thrift institution in an emergency acquisition.' 76 Although
subsequent thrift branching rights may be exercised only by a thrift
institution and not by a bank into which a thrift has been merged, the bank
tmhaoyserebtraainncthhersiftwborualndchneost eoxthisetrinwgisaet btheepteimrmeitotefdthefomrtehregebraenvke.n t7hough
In some instances, a bank holding company's business philosophy may
have guided its decision to retain the thrift subsidiary as a separate
institution and not consolidate it with an existing bank subsidiary. 78 For
instance, a philosophy of local control and community service typifies
many multi-bank holding companies. It is likely that such a holding
company would elect to maintain its separate thrift subsidiaries even if an
Oakar transaction were possible.
FactorsLimiting Bank Holding Company Acquisitions of Solvent
Many bank holding companies have acquired savings associations
since the enactment of FIRREA and have taken advantage of the Oakar
consolidation mechanism to maximize the economic efficiencies of the
acquisition. The great majority of the bank holding company-thrift
acquisitions since FIRREA, however, have been acquisitions of insolvent
thrifts from the RTC in emergency transactions, notwithstanding the
opportunity to purchase solvent savings associations. 7 9 The RTC has
entered into 378 separate transactions in which $80.2 billion in thrift
deposits have been sold by the RTC to banks or bank holding
companies.'8 ° In the comparable time period, only thirty-nine private
acquisitions by bank holding companies of thrifts were announced and these
involved only $9.9 billion in thrift assets. 8 ' Prior to FIRREA, however,
when bank holding companies were authorized to acquire only failed
thrifts, very few failed thrift acquisitions took place over a seven-year
Although bank holding companies were authorized to purchase
insolvent thrifts prior to FIRREA, several statutory changes in FIRREA
have made failed thrift acquisitions more attractive from the perspective
of a bank holding company. Prior to FIRREA, the CEBA moratorium
on exit from FSLIC prevented efforts by bank holding companies to
consolidate thrift subsidiaries into bank subsidiaries and realize the resulting
operating efficiencies. 8 3 Further, the tandem operations restrictions
imposed by the Federal Reserve Board on thrift purchases prior to
FIRREA prohibited bank holding companies from engaging in
crossmarketing activities between bank and thrift subsidiaries."' FIRREA
prohibits the imposition of such restrictions,18 5 and removed restrictions
in place prior to its passage. 86 For bank holding companies that wish to
combine the operations of the acquired thrift with those of an existing
bank subsidiary, the Oakar transaction has proved popular in
effectuating that consolidation.1 87
Moreover, the supply of insolvent thrifts has dramatically increased
from the number of insolvent thrifts eligible for bank holding company
purchase from 1982 to 1989.188 Since August 1989, the RTC has taken
control of 615 thrifts and considers another 334 thrifts likely to be added
to its inventory. 189 With this large supply of institutions, it is not
surprising that many potential acquirers, including bank holding companies,
sions. 1id; see also Marks, supra note 139
(In the last nine months of 1989, banks
acquired thrift deposits in slightly less than 50% of the branch sales by thrifts)
supra note 120
(during the first three quarters of 1990, an additional 20 nonemergency
bank-thrift combinations were announced)
; Matthews, supranote 126
(from August 1989
until the end of December 1989, 25 bank holding company acquisitions of healthy thrifts
182. See Matthews, supra note 126
("The first bank acquisition of a thrift only dates to
1982 and, given both regulatory difficulties and bankers' attitudes, few occurred")
& Stock, supra note 9
(few bank holding companies have acquired failed thrifts since
183. See supra text accompanying notes 38-41.
184. See supra text accompanying notes 31-34 and notes 66-68.
185. See FIRREA, supra note 1, § 601(a), 12 U.S.C. § 1843()(2) (Supp. 1 1989).
186. FIRREA § 601(b) provides:
If the Board of Governors of the Federal Reserve System, in approving an
application by a bank holding company to acquire a savings association, imposed
any restriction that would have been prohibited under section 4(1)(2) of the
Bank Holding Company Act of 1956... if that section had been in effect when
the application was approved, the Board shall modify that approval in a manner
consistent with that section.
FIRREA, supra note 1, § 601(b), 12 U.S.C. § 1843 note (Supp. 1 1989).
187. This was not an expected use of the Oakar Amendment. See supra text
accompanying notes 156-58.
188. See Scott, supra note 9, at 1883 (thrift institution failures increased from only II
in 1980 to 223 in 1988).
189. See Wall St. J., June 24, 1991, at 3. Of the 615 savings associations closed by the
RTC, approximately two-thirds have been sold or liquidated. Id.
have found that insolvent thrifts are selling at attractive prices. 9 0
Notwithstanding the substantial business advantages of private market
acquisitions of savings associations by bank holding companies, only
some forty nonemergency acquisitions of savings associations by banks
or bank holding companies have been announced since FIRREA's
enactment. 191 It is likely that nonassisted acquisitions of healthy thrift
institutions have been limited for several reasons.
First, as just discussed, the large supply of insolvent thrifts and
attractive prices offered by the RTC have diverted a great deal of the bank
holding company demand for thrift deposits from the private sector to
RTC-arranged acquisitions. 9 2 Second, economic conditions since
FIRREA's enactment in August 1989 and the substantial transaction costs
associated with a thrift acquisition have played a role in explaining why
there has not been greater healthy thrift acquisition activity. During the
recent economic slowdown, bank holding companies have had less
demand for deposit growth because of declining lending opportunities.
Moreover, many bank holding companies have experienced declines in
earnings and are thus not in a position to pay cash for thrift institutions.
As a consequence of relatively low bank stock prices during this period,
many bank holding companies have been reluctant to acquire thrift
institutions through an exchange of bank holding company stock. 193 Mergers
and acquisitions of banks have been adversely affected by these economic
factors as well. 194
Third, notwithstanding the many advantages of an Oakar transaction
and its popularity to date, there are several structural and legal problems
with the provision. Some of the uncertainty accompanying Oakar
transactions results from the placement of the Oakar Amendment in the
Federal Deposit Insurance Act rather than in the Bank Holding Company
190. See Nagle, RTC and FDICFind a Buyer's Market for Failed Institutions, Am.
Banker, Mar. 27, 1991, at 11
(each quarter since the second period of 1990 has produced
fewer buyers for insolvent thrifts and lower prices)
; Nagle, supra note 11 ("The RTC is a
motivated seller with a virtually limitless supply of product so, except in unusual
circumstances, there is not reason to bid aggressively.").
191. Data provided by SNL Securities, supra note 10, indicates that these transactions
involve $9.9 billion in thrift assets. Thirty-nine private acquisitions involving $9.9 billion
in thrift assets have been announced by banks or bank holding companies since FIRREA.
In addition, 68 thrift branch sales to the bank industry involving $13.4 billion in deposits
have been announced. An additional $12.5 billion in thrift deposits are affected by 26
announced thrift conversion transactions with banking institutions, some of which,
however, are supervisory conversions. See id.
192. See Marks, supra note 179 (The "glut of public sales has understandably taken
acquirers' attention away from private transactions.").
193. See id. (one factor accounting for dramatic drop in private deal activity is the
"sharp decline in market value, which has drastically devalued the favored currency of
bank transactions: stock"). But see Nagle, Despite DepressedShare Prices,Stock
Acquisitions Show Signs ofLife, Am. Banker, Dec. 27, 1990, at 13 (suggesting that stock
acquisitions of banks and thrifts are "making a comeback of sorts").
194. See Piro & Nagle, supra note 11 (indicating that non-assisted bank acquisitions
are picking up).
Act, where one would naturally expect to find a provision permitting a
bank holding company to consolidate the operations of a savings
associations subsidiary with a bank subsidiary. The Oakar Amendment also
does not directly authorize the merger of a savings association into a
bank or the conversion of a savings association charter to a bank
charter.195 Moreover, an Oakar transaction is subject to numerous regulatory
approvals. The Oakar Amendment specifically requires that both the
Federal Reserve Board196 and the federal banking agency that has
regulatory responsibility for the resulting bank subsidiary approve the
transaction. 197 Additional regulatory applications and approvals are required
to actually consummate an Oakar consolidation, however. 198 The time
195. The Sasser Amendment, however, authorizes a savings association to convert to a
bank so long as the resulting bank retains SAIF deposit insurance. See supro text
accompanying notes 98-99. Although the Sasser Amendment contains no specific language
enabling the thrift-to-bank charter conversion, these conversions have been authorized by
the OTS. See OTS Chief Counsel Opinion No. 90/CC-18 (Nov. 17, 1990), [Current]
Fed'l Banking L. Rep. (CCH) 82,453. The OTS has reasoned that it would permit a
federally chartered savings association to convert to a national bank directly because the
same result could be accomplished indirectly through one of two possible structures. See
id. The federal savings association could convert to a state chartered savings association,
which might then convert to a state bank if so permitted under state law. See id.
Alternatively, the federal savings association could voluntarily dissolve pursuant to 12 CF.R.
§ 546.4 (1991), and its assets and liabilities could be transferred to a bank in a purchase
and assumption transaction. See id See also OTS Corporate and Securities Division
Opinion No. 91/CS-05 (Mar. 25, 1991), [Current] Fed'l Banking L. Rep. (CCH) ] 82,500
(approving an application by a state savings association to convert to a state bank
charter); J. Williams, supra note 93, § 8.02 (discussing conversions of savings associations to
196. See FIRREA, supra note 1, § 206(a)(7), 12 U.S.C. § 1815(d)(3)(A) (Supp. I
197. See id.
198. See generallyAccountingfor Acquisitionsof Thrifts by NationalBanks, supra note
162, at App. B (describing different filing and approval requirements depending on the
structure used to consummate the Oakar consolidation). For instance, assume that the
target savings association is a federal stock savings association and that it is to be
converted to an interim national bank, which is then to be merged into an existing bank
subsidiary of the bank holding company. In addition to the approvals specifically
required by the Oakar Amendment, the OTS must approve the conversion. The OCC must
grant a charter for the interim national bank and approve of the savings association
conversion to a national bank. The federal banking regulator of the resulting bank must
approve a Bank Merger Act application for the merger of the interim national bank into
the existing bank subsidiary. Finally, the Federal Reserve Board must approve the bank
holding company's acquisition of the additional interim national bank subsidiary. If a
state institution is involved, applications to and approvals from the state banking or
savings association regulator are also required. See OTS Chief Counsel Opinion No.
90/CC18, supra note 195; Norwest Corp., 76 Fed. Res. Bull. 873, 874 n.2 (1990) (use of an
interim bank "does not appear to cause an otherwise qualifying transaction to fall outside
the bounds of the Oakar Amendment").
Under an alternative structure of the Oakar consolidation, the bank holding company
might establish an interim savings association subsidiary to purchase the assets and to
assume the liabilities of the target savings association and then plan for the existing bank
subsidiary to effect a purchase and assumption transaction with the interim savings
association subsidiary. The OTS or state authority must charter the interim savings
association. The bank holding company must apply to the Federal Reserve Board for
from the announcement of an Oakar transaction to its final
consummation after receipt of all regulatory approvals can easily take one year.
Understandably, some bank holding companies may be waiting on the
sidelines to observe how other acquisitions are structured and to wait for
the regulatory approval process to be streamlined.
The Oakar Amendment also contains several unnecessary
requirements, one of which-the capital limitation provision-has now
expired.19 9 The deposits attributed to the former savings association are
assumed to grow at a minimum seven percent annual rate, and SAIF
deposit insurance must be paid on this increasing deposit base. Prior to
the equalization of SAIF and BIF deposit insurance rates, the unrealistic
growth rate upon which the more expensive SAIF deposit insurance was
based may have been a factor in discouraging some Oakar consolidations.
A remaining problem with the Oakar Amendment is the requirement
that the depository institution subsidiaries of the bank holding company
proposing an Oakar consolidation have assets that are twice the size of
the savings association to be acquired.2 "° The Federal Reserve Board has
indicated that the assets of the savings association to be acquired may be
counted in determining the assets of the acquiring bank holding
company.20 ' Nevertheless, the requirement precludes bank holding company
acquisitions of savings associations that are still too large with respect to
the bank holding company acquirer.
Finally, acquisitions of marginal, but still solvent, savings associations
may have been affected by the cross-guarantee provision added in
FIRREA to the Federal Deposit Insurance Act. If the target savings
association is in a weak financial position, a bank holding company may be
unwilling to take the risk that the thrift assets are worth even less than
expected.20 2 If a bank holding company structures a thrift acquisition as
an Oakar transaction and merges the acquired thrift into an existing
bank subsidiary, the resulting bank subsidiary would realize any losses
suffered as a result of any poor thrift assets purchased. If the
combinapermission to acquire the interim savings association as a nonbanking subsidiary. The
bank holding company may also have to file an application for approval to purchase the
interim savings association pursuant to the Savings and Loan Holding Company Act. A
Bank Merger Act application must be made for the consolidation of the interim savings
association and the bank subsidiary. Finally, the OTS must approve of the dissolution of
the interim savings association.
199. See supra note 97 and accompanying text.
200. See FIRREA, supra note 1, § 206(a)(7), 12 U.S.C. § 1815(d)(3)(E)(i) (Supp. I
1989); see supra text accompanying note 93.
201. See supra note 93.
202. Bank holding companies also structure proposed acquisitions with escape clauses
in the event that the assets of the target institution are not as valuable as when the
acquisition was announced. See Moore & Murphy, supra note 115, at 24 ("We think bank
holding companies will be hesitant to guarantee the health of an acquired thrift at the
expense of a bank subsidiary."); Sanchez, Cancellation Rate Climbs in the 3d Quarter,
Am. Banker, Oct. 31, 1990, at 21 (many pending acquisitions are being terminated
because of "clauses in contracts that allow buyers to terminate an agreement on the basis of
deficiencies in balance sheet quality").
tion of the thrift and bank sufficiently weakens the bank subsidiary, it is
possible that the Federal Reserve Board may attempt to exercise its
"source of strength" regulation and require that the bank holding
company make any necessary infusions of capital into the ailing bank
Losses suffered by an acquired thrift could seemingly be insulated from
the assets of a bank subsidiary if the bank holding company acquired the
savings association and held it as a separate subsidiary. 2" The
crossguarantee provision that FIRREA added to the Federal Deposit
Insurance Act, however, eliminates this advantage of the separate corporate
form by requiring that each depository institution guarantee the FDIC
for any losses it suffers as a result of any commonly controlled depository
institution."° Thus, retaining a separate corporate form for the thrift
institution will not shield the assets of other commonly controlled
depository institutions from losses the thrift subsidiary may cause for the
Although the FDIC may waive the cross-guarantee if necessary to
facilitate a proposed acquisition,' once it is waived the thrift subsidiary is
no longer treated as a sister bank of the other depository institution
subsidiaries for purposes of the exemption to the affiliate transaction
restrictions of the Federal Reserve Act. 20 7 The perverse effect of the
crossguarantee provision on the FIRREA provisions, whose objective is to
attract bank holding company capital to thrift institutions, is that if the
proposed thrift target is only marginally solvent, the bank holding
company may find it more cost-effective to wait for the thrift to become
insolvent and to purchase a select portion of its assets from the RTC than to
purchase it prior to its insolvency in a private transaction without
government assistance.2 °8
203. See 12 C.F.R. § 225.4(a)(1) (1991) ("A bank holding company shall serve as a
source of financial and managerial strength to its subsidiary banks"); 52 Fed. Reg. 15,707
(1987) (Federal Reserve Board "source of strength" policy statement). But see MCorp
Fin., Inc. v. Board of Governors, 900 F.2d 852 (5th Cir. 1990) (holding that the Federal
Reserve Board's source of strength regulation exceeded its statutory authority), cert
granted, 111 S. Ct. 1101 (1991).
204. See FIRREA, supra note 1, § 601(a), 12 U.S.C. § 1843(i) (Supp. 1 1989).
205. See id. § 206(a)(7), 12 U.S.C. § 1815(e); supra notes 166-68 and accompanying
206. See FIRREA, supra note 1, at § 206(a)(7), 12 U.S.C. § 1815(e)(
5)(A) (Supp. I
); see also 55 Fed. eg. 21,934, 21,935 (1990) (FDIC policy on cross-guarantee
207. See id. § 206(a)(7), 12 U.S.C. § 1815(e)(5)(B) (Supp. 1 1989).
208. See Klinkerman,supra note 167 ("Acquirers will protect themselves by
withholding bids until weak institutions fail and get federal assistance, experts predict."). Another
detriment of the provision is that creditors of bank holding companies may no longer rely
on any stock of healthy bank subsidiaries as collateral for bank holding company debt.
See id; Doyle & DeSimone, supra note 39 ("A potential acquiror should carefully
consider the impact of the cross-guarantee provision on any acquisition, particularly of a
financially weak or undercapitalized savings association, since the acquisition may affect
the debt rating of affiliated banks and the ability of the parent or any affiliated banks to
raise equity capital."); Huggins, supra note 146.
EVALUATION OF THE CONGRESSIONAL OBJECTIVE AND
PROPOSALS FOR IMPROVEMENT
The goal of the FIRREA provisions permitting bank holding
companies to acquire savings associations is to attract bank holding company
capital to savings associations which, absent an infusion of capital, might
fail and be subject to government resolution at taxpayer expense. 2°9
Reducing government, and ultimately taxpayer, expense resulting from the
savings and loan crisis is obviously a worthy objective. Attracting bank
holding company capital to savings associations is one way of achieving
this objective, assuming that the bank holding company capital infused
into the savings association is sufficient to prevent it or the resulting bank
from becoming insolvent.
It is natural for Congress to look to bank holding companies as a
possible source of the additional capital badly needed by the thrift industry.
The operation of thrift institutions is closely related to banking, as the
Federal Reserve Board stated as early as 1977,210 and FIRREA's explicit
authorization of bank holding company ownership of thrifts was long
overdue. 211 Bank holding companies have the expertise necessary to
operate a savings association as a separate subsidiary or to combine the
operations of a savings association with an existing bank subsidiary in an
Oakar transaction. The fact that Oakar combinations of savings
associations and banks have been successful also highlights the similarity of
these once distinct businesses.
Further, because of other changes FIRREA made in the regulation of
savings associations, bank holding companies may be the only entities
capable of purchasing savings associations without serious jeopardy to
their preexisting operations.2 1 2 It is possible for a company that is not a
bank holding company to purchase a savings association.2 13 The
company would then become a savings and loan holding company and,
pursuant to the Savings and Loan Holding Company Act, would be allowed
under certain conditions to operate other businesses not related to
banking.2 4 FIRREA, however, amended the qualified thrift lender ("QTL")
test to provide that a savings association that does not meet the new QTL
209. See supra text accompanying notes 9-10.
210. See supra text accompanying note 20.
211. See Broome, supra note 28, at 847-49 (urging Congress to permit bank holding
company acquisitions of healthy thrift institutions).
212. Representative Oakar proposed an amendment to the bank reform legislation
currently being considered by the House Banking Committee that would permit banks,
thrifts, and nonbank banks not owned by bank holding companies to conduct an Oakar
transaction. See also H.R. 379, 102d Cong., Ist Sess. (1991) (a bill sponsored by Rep.
Oakar proposing a similar change in the Oakar consolidation mechanism). H.R. 6, 102d
Cong., 1st Sess. §§ 423-25 (1991); H. Rep. No. 157, 102d Cong., 1st Sess. 32 (1991).
213. See MacRae, supra note 8, at 34. See generally Vartanian, Schechter, Ansell &
Wald, Thrift Acquisitions by Industrial Companies in the Post-FIRREA Environment,
Banking Expansion Rep., June
, at 1.
214. See 12 U.S.C. § 1467a(n) (Supp. 1 1989). A savings and loan holding company
owning only a single savings and loan subsidiary may engage in any other commercial
test by devoting seventy percent of its assets to specifically designated
home mortgage assets would be deemed a bank and would be regulated
like a bank for all purposes.2 1 As the owner of a bank, the former
savings and loan holding company would be considered a bank holding
company and would be subject to the Bank Holding Company Act's
more stringent limitations on the business operations of the holding
company's other subsidiaries, precluding all activities not closely related to
banking and a proper incident to banking.2 16 Thus, while FIRREA
increased the potential range of savings association owners by permitting
bank holding companies to acquire healthy thrift institutions, it
decreased the desirability and feasibility of thrift ownership for all other
The benefits of attracting additional capital to the savings association
industry from bank holding companies and other enterprises seem
obvious. If a savings association's own capital is insufficient to support its
long-term operations, it will be disposed of upon its eventual insolvency
only after governmental intervention and substantial taxpayer CoSt. 217
Moreover, as discussed in Part III, the bank holding company should
benefit from a savings association acquisition that results in a
cost-effective expansion of its market share.2 8
Furthermore, the possible detriments of attracting bank holding
company capital to savings associations do not outweigh the benefits
identified above. The FIRREA provisions do not compel savings associations
to end their separate existence and assent to bank holding company
acquisitions. A solvent savings association with adequate capital may
successfully resist takeover efforts by a bank holding company and continue
its operations as a thrift institution. To the extent that savings
associations consent to Oakar acquisitions by bank holding companies, the
savings associations do, of course, lose their separate existence as they
become absorbed by the bank holding companies and their existing bank
It is not necessary, however, to preserve the thrift industry separate
from the banking industry to ensure that the banking and borrowing
needs traditionally filled by thrifts continue to be met.' -° Thrift
institutions were originally developed in this country to provide home mortgage
activity so long as the savings association subsidiary is substantially engaged in residential
215. See supra text accompanying notes 144-45.
216. See 12 U.S.C. § 1843(c)(8) (1988).
217. See supra text accompanying notes 2-8.
218. See supra text accompanying notes 122-26.
219. See Bush, supra note 124, at 35 (suggesting that bank acquisitions of thrifts will
accelerate the breakdown of distinctions between different types of financial institutions).
220. See 135 Cong. Rec. S10, 196 (daily ed. Aug. 4, 1989) (statement of Sen. Bradley)
("As long as the demand for housing exists, financial institutions will provide funding");
Svare, supra note 123, at 14 ("A number of banking experts... do not expect the thrift
industry to survive in its current form. The need for size and scale will predominate.").
financing 221 because banks, especially national banks, had only limited
real estate lending powers.22 2 These restrictions were largely eliminated
by legislative changes in the early 1980s, and many banks have since
found home mortgage lending to be a profitable aspect of their loan
portfolio. Banks currently provide approximately one-half of all housing
finance. 223 To the extent that thrifts are consolidated into banks owned by
bank holding companies, the resulting banks have the necessary expertise
to continue the primary thrift function of the origination of home
Although thrift institutions were legislatively granted the ability to
diversify their loan portfolios with shorter-term loans (such as consumer
loans) in the early 1980s, 224 FIRREA's QTL test demands concentration
in home mortgage lending. 225 Banks thus enjoy a significant portfolio
advantage over thrifts because of their ability to structure diversified loan
portfolios that are better able to absorb interest rate fluctuations, whereas
thrifts are required to maintain a high level of concentration in home
mortgage lending. 226 Moreover, the secondary market in home mortgage
loans has developed considerably in the last decade. Home mortgage
loans may be securitized and sold to investors who, unlike banks or
thrifts whose assets are funded by relatively short-term deposit liabilities,
have a longer-term investment horizon.2 27 Mortgage finance companies
also currently fill a great deal of the home mortgage lending demand.
Critics argue that home mortgage borrowers will suffer as the result of
221. Long, Schiling & Van Cleef, Enhancing the Value of the Thrift Franchise: A
PossibleSolution for the Dilemma of the FSLIC? 37 Cath. U.L. Rev. 385, 389 (1988)
(S&Ls were formed "to provide a group of individuals with the means to pool their
savings through small, regular contributions, with the intent of providing each member with
an opportunity to borrow from the pool to finance the purchase of a house").
222. See Huber, FIRREA: Requiem for the Thrift Industry, 44 Consumer Fin. L.Q.
Rep. 74, 80 (1990). State chartered banks have traditionally participated in home
mortgage lending, but national banks were prohibited by the National Bank Act of 1864 from
offering home mortgage loans until 1916. See B. Klebaner, Commercial Banking in the
United States: A History 79 (1974). Thirty-year home mortgage loans were not
permitted for national banks until 1970. See Emergency Home Finance Act of 1970, Pub. L.
No. 91-351, § 704, 34 Stat. 462 (current version codified at 12 U.S.C. § 371 (1988)).
223. See 56 Banking Rep. (BNA) 867, 867 (1991) ("the thrift industry has become less
important as a provider of housing finance"; at the end of 1981, "thrifts held only about
20 percent of all mortgage-backed securities").
224. See Broome, supra note 28, at 801-04.
225. See 12 U.S.C. § 1467a(m) (Supp. 1 1989); supra text accompanying notes 144-45.
226. See Scott, supra note 9, at 1894, 1898
(because they had greater portfolio
diversification than S&Ls, banks suffered far fewer failures and losses than S&Ls in the 1980s)
Banking Rep. (BNA) 867, 867 (1991) ("a stricter QTL test would leave the [thrift]
industry vulnerable to economic cycles"); see also Pringle, supra note 61, at 202 (the FIRREA
QTL test "may be a substantial deterrent to thrift acquisitions which result in thrift
institutions remaining in existence as opposed to being converted or merged, because the
earnings potential of thrifts is limited by the imposition of restrictions on 'qualified thrift
investments' and 'portfolio assets' ").
227. 56 Banking Rep. (BNA) 867, 867 (1991) ("the development of mortgage backed
securities has lowered the demand for housing finance from thrifts since those securities
separate mortgage lending into origination, holding, and servicing").
consolidation of the thrift and bank industries. If some thrift branches
are eliminated upon the thrift's consolidation into a bank, home
mortgage borrowers may be inconvenienced. If banks have more profitable
lending opportunities, the use of thrift deposits to fund home mortgage
loans may be diverted to other lending purposes. If demand for home
mortgage loans outpaces a declining supply of funds for that purpose,
mortgage interest rates will increase. One of the greatest fears of those
opposed to financial industry consolidation, however, is that local control
over local deposits will end as bank holding companies divert local
savings association deposits to other uses in the holding company structure
and outside the savings association's market area.
These arguments against consolidation of thrifts and banks are not
convincing. Savings association branches that overlap with the branches
of a bank into which the savings association is consolidated will no doubt
be eliminated for reasons of operating efficiency. This elimination of
branches, however, should benefit the customers of the new bank
subsidiary because it will result in decreased branch operation costs.
Competitive considerations in a customer service business, moreover, will ensure
that customers will continue to be served by convenient branch locations.
Bank-thrift consolidations are subject to antitrust review under the Bank
Merger Act and combinations that would result in a substantial lessening
of competition in the relevant market will not be approved. 228
Although it is possible that, at least in the short run, the deposits of the
former savings association may be diverted from home mortgage loans to
other initially more profitable lending opportunities, in the long run this
diversion may help to ensure the profitability of the bank holding
company and its continuation as a provider of basic financial services. 229 If
the supply of funds available for home mortgage lending decreases, the
interest rate earned on home mortgages should increase.3 The
increased profit opportunities will attract some funds back into the home
mortgage lending market. It certainly cannot be argued that it is good
long-term policy for savings associations to offer low-cost home
mortgage loans that are not profitable for the savings association."'
Further, it is unlikely that local control over local deposits will be lost
upon consolidation of a savings association into a bank. As previously
228. See 12 U.S.C. § 1828(c) (1988).
229. See Nagle, supra note 143 ("In-market consolidation will reduce competition,
thereby allowing survivors to increase prices and to decrease unit costs.").
230. See MacRae,supra note 8, at 34 (mortgages "may become more expensive relative
to interest rate levels because of the elimination of desperate competitors"); Nagle, supra
231. In one bank holding company's view, the thrift that it acquired had "conceded to
competitive pressures by underpricing mortgage loan products with unrealistic teaser
rates and free options letting the borrower convert ARMs to fixed-rate loans." Sanchez,
supra note 202. Upon acquisition of the thrift, the bank holding company "immediately
rationalized mortgage pricing, thereby increasing profitability, reducing mortgage loan
demand, and freeing funds for other profitable uses." Id.
indicated, most bank holding companies are attracted to savings
associations in their existing market. 32 Expansions by bank holding companies
through the acquisitions of savings associations in new markets are
relatively rare. Even in such cases, however, the recent community bank
movement again demonstrates that customer demand for local
institutions satisfying local lending needs will ensure that such needs continue
to be met. Moreover, the Community Reinvestment Act provides some
assurance that local borrowing needs will be served.233
Although there are compelling arguments in favor of permitting bank
holding company acquisitions of savings associations as a means of
attracting private capital to the thrift industry, the substantial financial
risks to bank holding company acquirers of such acquisitions must also
be considered. The financial risks to a bank holding company and its
bank subsidiaries that may be a party to an Oakar consolidation may be
quite serious if the acquired savings association proves to be less valuable
than expected. A bank holding company, therefore, may be unwilling to
effect an Oakar transaction and expose the earnings of its bank subsidiary
to the losses that may be occasioned by bad loans from the target savings
association. The holding company itself faces potential liability if the
Federal Reserve Board successfully applies its source of strength
regulation to make the holding company responsible for any additional capital
needed by the bank subsidiary.234
The acquisition of a weak savings association and operation of it as a
separate thrift subsidiary without an Oakar consolidation into a bank
subsidiary will also not protect the operations of the bank subsidiaries
from losses that may be realized in the separate thrift subsidiary. The
cross-guarantee provision added by FIRREA to the Federal Deposit
Insurance Act puts the assets of commonly-controlled bank subsidiaries at
risk should the savings association subsidiary become insolvent and cause
losses for the FDIC.235 Given the risk that the acquisition of a weak
savings association poses to the bank subsidiary's profits, many bank
holding companies may find it advantageous to wait for a marginal target
savings association to be taken over by the RTC, and then arrange an
expedited transfer on favorable terms from the RTC. Thus, the
crossguarantee provision may operate to discourage bank holding company
purchases of marginal savings associations, presumably the group of
institutions that would benefit most from an infusion of bank holding
company capital and the group of institutions that present the greatest risk of
becoming insolvent and having to be resolved at taxpayer expense.
On balance, the potential savings to the government and ultimately to
232. See supra text accompanying note 122-23 and note 146.
233. See 12 U.S.C. §§ 2901-06 (1988 & Supp. 1 1989).
234. See supra note 203 and accompanying text.
235. See Moore & Murphy, supranote 115, at 24 ("we think bank holding companies
will be hesitant to guarantee the health of an acquired thrift at the expense of a bank
subsidiary"); supra notes 204-05 and accompanying text.
the taxpayers resulting from encouraging private bailouts of savings
associations seem worth any changes in the structure of the financial
services industry that may result from bank holding company acquisitions of
thrifts. Thus, if the goal of attracting bank holding company capital to
solvent thrifts identified in FIRREA is a goal worth achieving, it is
important to explore ways to encourage greater use of the private resolution
One obvious way to make savings association acquisitions more
attractive to bank holding companies is to attempt to reduce the financial risks
of these acquisitions occasioned by the possible application of the Federal
Reserve Board's source of strength regulation and the FDIC's
crossguarantee provision. This, however, is an area requiring further thought
and study. For instance, consideration should be given to whether the
cross-guarantee provision should be eliminated, whether the FDIC
should freely waive its application in the case of the purchase of a
marginal thrift without the imposition of any further conditions and without
the loss of the sister bank exemption from the affiliate transaction rules,
and whether there may be some other mechanism to protect the FDIC
from the abuses that the cross-guarantee provision was designed to end
without inhibiting marginal thrift acquisitions." 6 Congress is currently
considering legislative proposals that would add the Federal Reserve
Board's source of strength regulation 7 to the federal banking statutes,
thereby eliminating the argument that the regulation exceeds the Board's
statutory authority.2 3
In Part III, several other reasons were offered for the lack of additional
acquisitions of solvent thrifts by bank holding companies. 9 One of the
possible explanations was the general slowdown in acquisition activity
occasioned by the recessionary economy. 2' Thus, we should expect
that, as the economy improves, acquisition activity, including bank
holding company acquisitions of thrifts, will increase.
A second factor was the increased attraction, since FIRREA, of bank
holding companies to savings associations sold by the RTC in
government-assisted transactions.24 It is not suggested that private
acquisitions be made more attractive by reducing the desirability of insolvent
institution purchases. Indeed, the RTC should be encouraged to
streamline these acquisitions as much as possible to facilitate quick purchase
and minimize the time of government ownership and operation. What
should be encouraged, however, are private acquisitions of marginal
say236. See 56 Banking Rep. (BNA) 1144, 1144
(As of March 1, 1991, there were 2,283
thrifts in the private sector compared with 2,342 thrifts at the end of 1991. Three
hundred seventy-eight of the thrifts were classified as having poor earnings and low capital,
and an additional 164 institutions are considered in even worse condition.)
237. See supra note 203.
238. See H.R. 6, 102d Cong., Ist Sess. § 601 (1991).
239. See supra text accompanying notes 192-201.
240. See supra text accompanying notes 193-94.
241. See supra text accompanying note 192.
ings associations. It is reported that the RTC may sometimes require
potential purchasers of marginal but solvent thrifts, for which no
conservator or receiver has yet been appointed, to participate in a formal
bidding process for the target savings association. Although a bidding
process may appear to achieve a higher price for an institution than a
privately arranged acquisition, there is little doubt that the bidding
process discourages easy and quick dispositions. If a potential bank holding
company acquirer and a solvent savings association have reached
agreement on an acquisition, the RTC should not interfere with the private
transaction, even if it feels a better price for the savings association could
be obtained from other potential acquirers.
It is also possible that the objective of attracting capital to the thrift
industry could be better achieved through some modest reform of the
current statutory scheme set forth in FIRREA.24 2 For instance, the
Oakar Amendment which is currently located in the Federal Deposit
Insurance Act, should be recodified in or cross-referenced in the Bank
Holding Company Act, where it logically belongs.
The regulatory review and approval process associated with the Oakar
Amendment should also be streamlined. Direct statutory authority
should be provided for a savings association to convert to a national bank
charter.24 3 The regulatory applications and approvals currently required
should be eliminated in favor of approval from the federal banking
regulator of the resulting bank, who should be charged with ensuring that the
resulting bank is safe and sound.
The OTS has little interest in an Oakar transaction so long as the
FDIC's SAIF fund continues to receive deposit insurance premiums
based on the former savings association's deposits. The FRB in its
capacity as regulator of bank holding companies and their nonbanking
subsidiaries also has little interest in approving a transaction that affects only
a banking subsidiary of the bank holding company. Eliminating
duplicative, time-consuming and expensive federal regulatory review would
reduce the costs associated with Oakar transactions and increase their
attractiveness to bank holding companies.
In addition, whatever regulator is charged with review and approval of
the Oakar transaction should do so on an expedited basis. Time is
crucial to preserving the value of the target savings association and
encouraging private rather than government bailouts of marginal institutions.
Unless a savings association is insolvent and the RTC has been appointed
a conservator or receiver of the institution, the RTC should not interfere
242. See H.R. 379, 102d Cong., 1st Sess. (1991) (a bill sponsored by Rep. Oakar to
modify the Oakar transaction).
243. See supra text accompanying notes 196-98. Representative Oakar has proposed a
bill that would provide direct merger authority for a savings assocation - bank conversion
and would also provide for an expedited review process. See H.R. Rep. 379, 102d Cong.,
1st Sess. (1991).
with a proposed private acquisition by requiring that bids for the
marginal institution be solicited from other potential acquirers.
Some of the seemingly arbitrary requirements of the Oakar
Amendment should also be eliminated or revised. Fortunately, the capital
limitation provision is eliminated as of August 1, 1991.' The Oakar
Amendment further requires that the bank holding company party to the
Oakar transaction be twice the size of the savings association party. 43
The legislative history of the provision provides no justification for this
seemingly arbitrary requirement, and it should also be eliminated. The
Oakar Amendment assumes that the former SAIF deposits will grow at a
minimum annual rate of seven percent, and SAW deposit insurance
premiums are assessed on this basis. 2' Although the economic
consequences of this unrealistic assumption are not as severe after the
equalization of SALF and BIF deposit insurance premiums on July 1,
1991, it should also be removed.24 7
More significantly, the greatest financial disincentive to an Oakar
transaction with a healthy savings association is the recapture of the
savings association's bad debt reserve upon its conversion to a bank.
Elimination of the recapture, or a phased-in recapture period over the course
of several years, might make savings associations more attractive to bank
holding companies wishing to consolidate a savings association with a
bank subsidiary.2 48
244. See supra text accompanying note 97. This provision was problematic because
the statute was not clear as to when the capital requirement had to be satisfied-at the
time the acquisition of the savings association was announced, or at the time the Oakar
consolidation was consummated.
245. See supra text accompanying note 93 and notes 200-01.
246. See supra note 88 and accompanying text.
247. The seven percent growth rate for SAIF deposits still affects the amount of SAIF
deposits upon which the SAIF exit fee will be assessed if the bank attempts to convert the
SAIF deposits to the BIF fund upon the expiration of the deposit insurance conversion
248. See, eg., 56 Banking Rep. (BNA) 747 (1991) (the chairman of the U.S. League of
Savings Institutions urged the House Banking Financial Institutions Supervision.
Regulation, and Insurance Subcommittee to permit thrifts to convert to commercial banks
without having to pay taxes on their bad debt reserves); 56 Banking Rep. (BNA) 680 (199 1) (a
savings bank official urged Congress to eliminate the requirement that a thrift's bad debt
reserve be recaptured and taxed upon the thrift's conversion to a bank); 56 Banking Rep.
(BNA) 63 (1991) (the "most important barrier" to a thrift's conversion to a commercial
bank charter is recapture of the thrift's bad debt reserve).
249. The OTS recently announced that it is developing an open assistance plan to help
rehabilitate troubled, but still solvent, savings associations. See 56 Banking Rep. (BNA)
1144 (1991). Pursuant to this plan, a combination of private capital and government
these proposed statutory modifications there are numerous advantages to
an Oakar transaction for a bank holding company, especially if the
savings association target is still organized as a mutual institution. The
Oakar Amendment provides a mechanism for the current consolidation
of the bank and thrift industries and thus represents a step towards
greater consolidation of depository institutions.
3. See Tucker , Meire & Rubinstein, The RTC- A PracticalGuide to the Receivership/ConservatorshipProcessand the Resolution ofFailed Thrifts, 25 U. Rich . L. Rev. 1 , 39 ( 1990 ).
4. See A Buyer's Guide: How to Purchasea Savings Associationfrom the R TC, [Current] Fed. Banking L. Rep. (CCH) 70 ,503, at 46 ,519 ( Mar . 2, 1990 ); Zisman & Churchill, FederalAssistance Relating to Failingand Failed Thrifts, Banking Expansion Rep., Aug . 21 , 1989 , at 1.
5. See Strategic Plan for Resolution Trust Corporation, 54 Fed. Reg. 46 , 574 , 46 , 576 ( 1989 ).
6. See R.T.C. Release , Mercury Fed'l Savings and Loan Ass'n, Huntington Beach, CaL, Acquired by Security Pacific Corp ., Los Angeles, CaL (Sept. 21 , 1990 ), 1990 WL 203720 (RTC).
7. See id. (the RTC agreed to buy back from the purchaser assets subsequently found to have documentary deficiencies or specific defects).
8. MacRae, Where's the Capital?Bank Admin ., November 1989 , at 30.
9. Estimates of the total cost of the S&L crisis vary, but some suggest costs in the range of $120 billion to $150 billion, for a total of some $300 billion when financing costs over 30 years are considered . See 47 Cong. Q. 2113 (Aug. 12 , 1989 ). FIRREA provided that the government cost of resolving insolvent thrift institutions would be financed in part by the issuance of $50 billion in 30-year bonds, with the Treasury paying the bond
21. See iaat 284-5. The Board noted, however, that the existence of a separate regulatory structure does not in and of itself indicate that Congress intended to prohibit common ownership of banks and thrifts . See also id at 285 ( discussing American Fletcher Corp ., 60 Fed. Res. Bull . 868 ( 1974 )).
22. See 63 Fed. Res. Bull. at 286.
23. See id at 286-87.
24. See 12 U.S.C. § 1842(d ) ( 1988 ).
25. See Citicorp, 68 Fed. Res. Bull. 656 ( 1982 ) ; Interstate Financial Corp ., 68 Fed. Res. Bull . 316 ( 1982 ).
26. Interstate Financial Corp., 68 Fed. Res. Bull. at 317; accord Citicorp, 68 Fed. Res.Bull. at 663 app. These acquisitions may be justified as consistent with D.H. Baldwin's concern about possible reduction of competition because the purpose of permitting acquisitions of insolvent thrifts is "to restore the troubled thrift to health, thereby increasing competition between thrifts and commercial banks in the same markets." Heifer & Korn, Thrift Acquisitions by Bank Holding Companies Banking Expansion Rep ., Mar , 6 , 1989 , at 1.
27. The Gan-St Germain Depository Institutions Act of 1982 , Pub. L No. 97 - 320 , 96 Stat. 1469 ( 1982 ) (current version codified in scattered sections of 12 U .S.C.).
28. See 12 U.S.C. § 1730a(m) ( 1988 ) (repealed 1989); S.Rep . No. 536 , 97th Cong., 2d Sess. 1 ,reprintedin 1982 U.S. Code Cong. & Admin. News 3054 , 3055 . Other significant aspects of the Gan-St Germain Act relating to the expansion of thrift institution powers are discussed in Broome , The Influence of Enhanced Thrift Institution Powers on Commercial Bank Market Expansion , 67 N.C.L. Rev . 795 , 802 - 04 ( 1989 ).
29. See 12 U.S.C. § 1730a(m)(3) ( 1988 ) (repealed 1989 ).
30. See id § 1730a(m)(3)(B).
31. See Michigan Nat'l Corp ., 75 Fed. Res. Bull . 88 ( 1989 ). See generally Heifer & Kom, supra note 26 (these restrictions "mandate that the deposit-taking activities of the holding company's bank (and other) subsidiaries will not be linked to the thrift's accounts, and that the solicitation of loans and deposits for the thrift will be kept entirely separate from the loan and deposit solicitation for the holding company's other subsidiaries" ).
32. The restrictions imposed by the Board typically prohibited the operation of the thrift subsidiary in tandem with any other subsidiary of the bank holding company . See, e.g., Michigan Nat'l Corp., 75 Fed. Res. Bull . 88 , 89 ( 1989 ). Specifically, no banking subsidiary could link its deposit-taking activities to accounts at a thrift subsidiary in a sweeping arrangement, and no bank subsidiary could solicit deposits or loans for a thrift subsidiary . See 54 Fed. Reg . 15 , 806 ( 1989 ) (requesting comments on tandem operations restrictions for bank holding company-acquired thrifts).
33. 54 Fed. Reg. 37 , 297 , 37 , 300 ( 1989 ).
34. See 12 U.S.C. § 1730a(m)(5)(A) ( 1988 ) (repealed 1989 ). The Federal Reserve Board restricted thrifts acquired by banks to branching only in locations in which national and state-chartered banks located in the same state could establish branches . See Barnett Banks, Inc., 75 Fed. Res. Bull . 82 , 89 ( 1980 ) (limiting thrift to bank branching in order to "minimize the impact of bank holding company thrift acquisitions on the authority of a state to limit the expansion of financial institutions within its borders" ).
The Garn-St Germain Act amended the Bank Holding Company Act's definition of "bank" to exclude thrifts that might have otherwise been included in the previous definition as institutions accepting demand deposits and making commercial loans . See The Garn-St Germain Act of 1982 , Pub. L. No. 97 - 320 , § 333 , 96 Stat. 1469 , 1504 (amending 12 U.S.C. § 1841(c)); see Broome , supra note 28 , at 838-39.
35. The Garn-St Germain Act of 1982 , Pub. L. No. 97 - 320 , § 141 ( a)(7), 96 Stat . at 1489 (expired Oct. 15 , 1985 ).
36. See Act of Aug. 27 , 1986 , Pub. L. No. 99 - 400 , § l(a), 100 Stat. 902 , 902 ; Act of Oct. 8 , 1986 , Pub. L. No. 99 - 452 , § 1 ( c ), 100 Stat. 1140 , 1140 ( 1986 ).
37. See Competitive Equality Banking Act of 1987 , Pub. L. No. 100 - 86 , § 509 ( a ), 101 Stat. 552 , 635 [hereinafter CEBA]. The Board approved applications by bank holding companies to acquire failing thrifts under its general authority to approve acquisitions of nonbanking institutions after the Gain-St Germain Act authority had expired and before covery and Enforcement Act of 1989: An Overview, 44 Consumer Finance LQ . Rep . 83 ( 1991 ).
52. See FIRREA , supra note 1, § 204(b) , 12 U.S.C. § 1813(b) (Supp. 1 1989 ).
53. See id. § 301 , 12 U.S.C. § 1462a.
54. See id § 211 ( 3 ), 12 U.S.C. § 1821(a)(5) & (6).
55. See id § 501 ( a ), 12 U.S.C. § 1441a(b)(1).
56. See Comizio , FIRREA: New ProvisionsAffect Structuring Powers andActivities of Savings Associations , 44 Consumer Fin . L.Q. Rep . 155 ( 1990 ) ; Scott, supra note 9 , at 1984- 97 .
57. See generally Sheehan, Sweet & Van Cleef , Bank Holding Company Acquisitions of Thrifts Post-FIRREA, in Thrift Mergers and Acquisitions After FIRREA Including Bank Holding Company Acquisitions of Thrifts 595 ( 1990 ) ; Buchman, Charter Conversions, Branch Sales, and Bank and Bank Holding Company Acquisitions of Thrifi" A Post-FIRREA Guide, in Impact of the Thrift Reform Act and the Future of the Thrift Industry 175 ( 1990 ) ; Comizio, Post-FIRREA "Cross-Industry" Depository Institution Transactions: Current Regulatory Issues in Industry Consolidation, 45 Consumer Fin . L.Q. Rep . 275 ( 1991 ). Doyle, DeSimone & Frohlich, Acquisitions of Thrift Institutionsby Bank Holding Companies, in Impact of the Thrift Reform Act and the Future of the Thrift Industry 197 ( 1990 ).
58. See infra text accompanying notes 61-74.
59. See infra text accompanying notes 75-97.
60. See infra text accompanying notes 105-13.
75. H.R. Rep . No. 54 , supra note 48, at 309, reprinted in 1989 U.S. Code Cong. & Admin . News at 105.
76. Id . at 294, reprintedin 1989 U.S. Code Cong. & Admin . News at 90.
77. H.R. Conf . Rep. No. 222 , supra note 49, at 393, reprinted in 1989 U.S. Code Cong. & Admin . News at 432. This goal was also enunciated in the earlier report issued by the House Banking Committee . See H.R. Rep . No. 54 , supra note 48, at 410, reprinted in 1989 U.S. Code Cong. & Admin . News at 206.
78. Apparently, as originally proposed, the Oakar Amendment was to be attached to the thrift acquisition enhancement provisions amending the Bank Holding Company Act . In the Conference Committee, the amendment was moved to the Federal Deposit Insurance Act where it was an amendment to the insurance conversion moratorium provisions .
79. See FIRREA , supra note 1, § 206 ( a)(7 ), 12 U.S.C. § 1815(d)(3) (Supp. 1 1989 ). The statute provides that notwithstanding the five-year insurance conversion moratorium, "any bank holding company that controls any savings association may merge or consolidate the assets and liabilities of such savings association with, or transfer such assets and liabilities to, any subsidiary bank which is a Bank Insurance Fund member." Id
80. Consolidation of a savings association and a bank subsidiary was permitted only if the savings association was acquired in an emergency acquisition . See infra text accompanying notes 111-13.
81. See Garsson , House May Seek to Let Banks Convert Acquired S & Ls Sooner , Am. Banker, July 20 , 1989 , at 1 (predicting that "a number of measures-including the Oakar 2 .
100. See id. § 1815(d)(2)(C)(i). See generally Stein, Branch Purchasesand Sales: Response to Demand for Capital Restructuringfor Savings and Loans, 54 Banking Rep . (BNA) 1011 ( 1990 ); Mitchell, Thrift AcquisitionsAfter FIRREA (PartI1) , N.Y.L.J. , Apr . 14 , 1990 , at 3.
101. 12 U.S.C. § 1815(d)(2)(C)(i) (Supp. 1 1989 ). If the deposits are transferred to a bank subsidiary of a bank holding company, the bank subsidiary is regulated as any bank subsidiary would thereafter be regulated .
The Administration bill also permitted an insubstantial deposit transfer. The FDIC may consent to a conversion transaction if the transaction affects only an insubstantial portion of the insured liabilities of each financial institution participating in the conversion transaction. The FDIC would determine whether the transaction affects only an insubstantial portion of the deposit liabilities . See S. 413 , 101st Cong., 1st Sess. § 206 ( 5 ), 135 Cong. Rec. S1517 (daily ed. Feb. 22 , 1989 ).
The Bank Merger Act , 12 U.S.C. § 1828(c), also applies so that the primary federal regulator of the resulting bank must approve the deposit purchase . See Grady , Profits (andPitfalls)Await in Buying or Selling Branches , Am. Banker, Jan. 9 , 1991 , at 6. If a state-chartered institution is involved in the transaction, the state regulator must also grant approval . Id.
102. See 12 U.S.C. § 1815(d)(2)(D) (Supp. 1 1989 ).
103. See id. § 1815(d) (2 )( E ).
104. See Mitchell, supra note 100, at 3. "A branch sale may be used by an undercapi2.
152. See 12 U.S.C. § 1815(d)(2)(D) (Supp. 1 1989 ).
153. See FIRREA , supra note 1, § 208 ( 4) (codified as amended at 12 U.S.C.A. § 1817(b) (West Supp . 1991 )); Vartanian, Ansell & Rockford, supra note 70, at 14.
154. As of July 1, 1991, BIF and SAIF assess deposit insurance at the same rate of 23 cents per $100 of deposits . See 56 Fed. Reg . 21 , 064 ( 1991 ) (to be codified at 12 C.F .R. § 327 . 13 (c)(2)) .
155. See FIRREA , supra note 1, § 217 ( a)(7 ), 12 U.S.C. § 1815(d)(3)(B) (Supp . 11989).
156. See Banc One Corp., 76 Fed. Res. Bull . 259 ( 1990 ) ; Southeast Banking Corp ., 76 Fed. Res. Bull . 99 ( 1990 ).
157. See FIRREA , supra note 1, § 217 ( 8 ), 12 U.S.C. § 1823(k)(1) (Supp. 1 1989 ).
158. See id. at § 206(a)(7) , 12 U.S.C. § 1815(d)(2)(C)(ii).
159. See Bush, supra note 124 , at 32-33 ( evaluating whether a bank holding company should retain an acquired thrift as a separate thrift subsidiary or consolidate it with a bank subsidiary).
160. See Savings Ass'n Ins . Fund Indus. Advisory Comm., Semiannual Report 17 (May 3 , 1991 ); Bush, supra note 124, at 32; Moore & Murphy, supra note 115, at 26; Svare, supra note 123, at 12 ; 55 Banking Rep . (BNA) 816 , 816 ( 1990 ).
161. See 26 U.S.C.A. § 593 ( West Supp . 1991 ). The deduction is permitted only if the thrift maintains 60% of its assets in qualified housing-related investments . Id. at § 593 ( a)(2).
162. See Rev . Rul., 85 - 171 , 1985 -2 C.B. 148 ; Accountingfor Acquisitions of Thrifts by NationalBanks, 1991 O.C.C.Q.J. Lexis 4 (Jan . 29, 1991 ) ( "Upon acquisition by a bank, the excess tax bad debt reserves taken by a thrift may be immediately recaptured, resulting in a tax liability. Furthermore, if the acquired thrift's average assets exceed $500 million, the entire bad debt reserve may have to be recaptured over future years as taxable income."); Doyle & DeSimone , supra note 39; Moore & Murphy, supra note 115, at 25- 26.
163. For a mutual thrift institution with $10 million in net worth, $6 million of the net worth may possibly be in the bad debt reserve. If that $6 million is taken into income at a 35% tax rate, the resulting tax liability is $2.1 million . See Moore & Murphy, supra note 115 , at 26.
164. See 12 U.S.C. § 1843(c)(8) ( 1988 ) (limiting nonbanking subsidiaries of a bank holding company to those activities so closely related to banking as to be a proper incident thereto).
165. See supra text accompanying notes 71-72.
166. See FIRREA , supra note 1, § 206 ( a)(7 ), 12 U.S.C. § 1815(e) (Supp . 11989); infra text accompanying notes 205-08.
167. See Doyle & DeSimone, supra note 39 ( "A potential acquiror should carefully consider the impact of the cross-guarantee provisions on any acquisition, particularly of a financially weak or undercapitalized savings association, since the acquisition may affect the debt ratings of affiliated banks and the ability of the parent of any affiliated banks to raise equity capital."); Huggins, supra note 146; Klinkerman, ProvisionDims Appeal of S&Lsfor Banks Firms,Am . Banker, Aug. 11 , 1989 , at 1 ("the most damaging aspect of
176. See Colorado ex rel. Colorado State Banking Bd v . RTC , 926 F.2d 931 , 948 ( 10th Cir . 1991 ) (upholding 12 C.F .R. § 1611 .1 issued pursuant to 12 U.S.C. § 1823(k)(1) & (k)(4)); Arkansas State Bank Comm'r v . RTC , 911 F.2d 161 , 173 ( 8th Cir . 1990 ) (same); see also Breslin, RTC Efforts to Pre-EmptState Banking Rules Draw Lawsuits , Rebukes from State Officials, 54 Banking Rep. (BNA) 622 ( 1990 ) ; McCray, FederalPreemptionof StateBranch BankingLaws UnderFIRREA , Intergovernmental Persp., Summer 1990 , at 7; supra note 111.
177. See 12 U.S.C. § 1823(k)(4) (Supp. 1 1989 ).
178. See Bush, supra note 124 , at 32-34.
179. See Marks , Weak Stocks, Troubled Assets Change the Shape of Deals, Am . Banker, Feb. 20 , 1991 , at 13 ( "In the private sector, the number and aggregate size of deals [for thrifts and banks] has gone down dramatically over the past two years.").
180. See SNL Securities, supra note 10; Nagle, Most Active Acquirers Have Taken AdvantageofFederalAssistance , Am. Banker, July 8 , 1990 , at 21 ( "The lure of governmentassisted transactions has reduced the flow of private-sector acquisitions to a trickle.").
181. SNL Securities, supra note 10 . The data provided by SNL Securities indicates that 39 private acquisitions involving $9.9 billion in thrift assets have been announced by banks or bank holding companies since FIRREA. Id. In addition, 68 thrift branch sales to the bank industry involving $13.4 billion in deposits have been announced . Id. An additional $12 . 5 billion in thrift deposits are affected by 26 announced thrift conversion transactions with banking institutions, some of which, however, are supervisory conver-