Measured against standards which you, yourself, defined as appropriate for debate on issues of substantial moment, in your Additional Views to the Report of the Committee on Energy and Commerce regarding Superfund Amendments of 1985 [dated August 1, 1985], I find a clear contradiction with respect to these hearings.

In your "Additional Views" statement you said:

"If the debate sinks to the level of vindictive distortion of fact and malicious personal attacks, the process itself is demeaned and the legitimate and serious concerns of the American people are damaged."

You also said "the deliberations on HR 2817 [the "Super fund" issue] were marred by a breach of comity and common decency so serious that comment is unfortunately, required."

You went on to say that "the central issues...are very
important to the health and safety of the American people; and
reasonable men and women may disagree as to the most effective
and efficient actions necessary to achieve prompt and thorough
cleanup of toxic waste" and that "while individuals may
disagree...responsible people recognize that each point of view
is based upon a sincere desire to create the very best possible
program to protect the health and welfare of the American
people."

I would note
te that in the proceedings with the Bank Board,
the Subcommittee you chair is dealing with the safety and
soundness of the nation's financial system and the public
confidence of the American people in their financial
institutions.

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Your concerns regarding the need for "common decency" in the debate and your indignation at "vindictive distortion of fact", "malicious personal attacks" and "demeaning" of the process through such behavior is fully shared by me and my colleagues at the Federal Home Loan Bank Board. As I have reviewed the transcripts of these hearings, statements made by some members of the Subcommittee have, in my view, all too often, represented a "breach of comity and common decency" and, in my opinion, they, unfortunately, also require comment.

Representatives of the Bank Board have appeared before your Subcommittee four times in the past six months to testify on the subjects that are to be discussed today. At each of those hearings, the Bank Board representatives have made every effort to be cooperative. But despite our good faith, candor, and willingness to cooperate, on each occasion certain members of this Subcommittee have leveled unfounded criticism after unfounded criticism at the Bank Board, and also have personally attacked its General Counsel and innocent private citizens. Protected by congressional immunity, these members have, in my view, irresponsibly misstated facts, ignored information we have provided, and resorted to innuendo and, frankly, verbal abuse of dedicated public officials and private citizens who at great personal sacrifice have worked to resolve a vexing and very difficult thrift industry crisis that has persisted for nearly five years. Because of such behavior, at times this hearing process has, in my own view, sunk to a "level of vindictive distortion of fact and malicious personal attacks," (to use the language of your August 1, 1985 "Additional Views" statement) which I fear has harmed the legitimate interests of the public, the thrift industry, the Bank Board, and the Congress.

As I have explained to this Subcommittee and to the House Banking Committee on numerous occasions since I assumed the Bank Board Chairmanship on May 1, 1983, the Bank Board has engaged in in what I consider to be herculean efforts to oversee an industry that has been thrust into an entirely new, and fiercely competitive and difficult deregulated environment. The challenges have been unprecedented. The thrift industry was terribly weakened by the interest rate ravages of 1981 and 1982. During those two years more than 750 FSLIC-insured savings institutions disappeared and the industry's net worth was reduced very substantially.

It is time to set the record straight. Hopefully, recitation of the facts will lay to rest the attacks I have referred to and permit each of us to get on with our tasks in a dignified manner and with mutual respect.

First, the Bank Board has been accused by members of the Subcommittee of a "pervasive level of lethargy and inertia", an "incredible pattern of negligence", and "not doing what needs to be done to protect the shareholders and depositors" of thrifts

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(July 19, 1985 hearing on Beverly Hills, Transcript at p. 9, 68, and Nov. 4, 1985 hearing on ESM, Transcript at pp. 6, 8, 10, 77). These accusations are unfounded and are insulting to the Board, its staff and the men and women of the Federal Home Loan Bank System.

In fact, the Bank Board has responded vigorously to the problems the industry faced during 1983 and 1984. We have tested the limits of our existing statutory authority and taken major regulatory steps to address these problems. We described these regulatory actions in detail in our July 19 testimony concerning Beverly Hills. We have established limits on excessive growth and direct investments, required improved accounting for ADC loans, established a new system for classifying problem assets, limited the placement of brokered funds in associations with low net worth, and increased net worth requirements for the industry. We also have attempted to limit further excessive risk to the FSLIC insurance fund by the abuse of brokered funds, only to be told by the courts that we exceeded our authority and that Congress would have to address the problem. We stood firm in our conviction that these actions were needed to preserve the safety and soundness of the industry, even though we encountered a firestorm of protest regarding the proposed net worth and direct investment rules from some segments of the thrift industry, and even some members of Congress. In fact, half of the members of the House endorsed H. Con. Res. 34, which was intended to derail implementation of the direct investment regulation. Just a month ago, a report on the direct investment regulation by the House Government Operations Committee praised the regulation as "an example of responsive regulation under difficult circumstances."

The second charge made against the Bank Board is that we are engaged in a "major cover up", "going to great lengths to keep the truth from the American people", and "fooling the public with accounting tricks." (Nov. 7 hearing on accounting controversies regarding S&L's, Transcript at pp. 4-6). Congressman Wyden alleged that the Bank Board is engaged in "accounting alchemy" in which "the books [of savings and loans under the MCP] are magically balanced"; he also alleged that in "entering goodwill on an institution's books as an asset" the Bank Board is, "in effect, perpetrating a bizarre myth." 7 hearing on accounting controversies regarding S&L's, Transcript at pp. 5-6). All these allegations are false.

(Nov.

The Subcommittee appears to be confused about the Bank Board's use of the MCP and the proper accounting treatment of goodwill.

The MCP is a new tool used by the Board as a containment, evaluation, and rehabilitation device. It is also meant to minimize the FSLIC's eventual costs in the event the MCP participant cannot be rehabilitated.

Comments of certain members of the Subcommittee implying that that goodwill was created by the Bank Board in MCP's to "magically balance" the books are totally unfounded. (November 7, 1985 hearing on accounting controversies regarding S&L's, Transcript at pp. 5, 6). As Mr. Passarelli tried to explain to the Subcommittee on November 7, there were no authoritative accounting guidelines for savings and loans under the MCP when Beverly Hills S&L was taken over by the FSLIC. A number of accounting questions needed to be addressed, including the question of goodwill. The Bank Board staff took the initiative and sought comments from the accounting industry through a formal submission to the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board. Subsequently, the question was submitted and was discussed at EITF's November 7, 1985 meeting. By action dated November 12, 1985, the EITF advised us that regardless of the previous form of the S&L (stock or mutual), the MCP is a significant event requiring mark-to-market accounting. It also advised that any resulting excess fair value of liabilities over fair value of identifiable assets should be recorded as negative net worth. The Bank Board is currently evaluating the effect of these accounting standards on our MCPs.

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A third charge leveled against the Bank Board involves our recent decision to charter a new liquidating corporation -- the Federal Asset Disposition Association (FADA) to manage and liquidate many of the bad assets in the FSLIC's portfolio. Congressman Wyden accused the Bank Board of "setting up a private operation that [Congress will not be able to scrutinize like [it] could a public one here in Washington" and locating it in Denver, Colorado, so that there would be no government oversight. (November 7, 1985 hearing on accounting controversies regarding S&L's, Transcript at p. 84-87, 90-91). Congressman Luken accused the Bank Board of creating "a toy for a bunch of people in the industry." Moreover, he said the Bank Board "is appointing these people from the industry [to the FADA Board] who have had a great deal to do with creating the problems" in the industry "like Mr. McKenna." That charge is untrue and absurd.

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With particular regard to Mr. McKenna, he is in no way a part of the problem he is part of the solution. Mr. McKenna's distinguished career and personal integrity is unquestioned by anyone who knows him. I am proud to have him as

Chairman of FADA.

The FADA was chartered as a federal stock association under authority granted the Bank Board by Congress in section 406(a) and (b) of the National Housing Act. The FSLIC is FADA's sole shareholder and it will serve only the needs stated in section 406 for asset liquidation and inter im management. This private-sector oriented approach is intended to improve the process of asset liquidation, reduce receivership holding costs, allow faster conversion of such assets to cash, and maximize the return from liquidation to the FSLIC. Contrary to

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the assertion that the FADA will not be subject to government oversight, the FSLIC -- and the Bank Board as FSLIC's operating head -- will maintain a strong oversight over all functions of this new federal association. The Board decided to locate FADA's headquarters in Denver because of that city's proximity to many of our problem asset cases, especially those in Texas and California. Locating the FADA in Washington -- 2,000 miles distant from those cases would violate basic precepts of sound business management and common sense. Any assertion that the Bank Board decided to locate FADA outside of Washington so that it would escape government oversight and accountability is preposterous.

As to Congressman Luken's charge at the November 7, 1985, hearing that the Board set up FADA to pay salaries in which the "sky is the limit" (Transcript p. 88), I would note that the FSLIC liquidation division has been hamstrung by federal staffing and salary constraints. We simply have not been able to attract the requisite talent and experience to handle the work-out of extremely complex real estate problem assets. purpose of FADA is to recruit people with great expertise from the private sector with proper compensation that the FSLIC cannot now pay.

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A fourth charge made against the Bank Board was that the minimum net worth standard was lowered from 5 to 4 percent in 1980, and then to 3 percent in 1983 as part of a scheme to make troubled thrifts appear healthier than they are. (November 7 hearing on accounting controversies regarding S&L's, Transcript at p. 100-103). The net worth standard was lowered prior to my becoming Chairman of the Bank Board. However, I recognized the perverse incentive this lowered standard created for rapid growth, and in early 1984 the Bank Board proposed a rule which involved a comprehensive strengthening of industry net worth requirements. In our final net worth requirement, the Bank Board incorporated three fundamental changes to thrift capital requirements. First, an institution's capital requirement was pegged to its' growth rate, with higher growth rates requiring a higher regulatory net worth requirement. Second, we eliminated some of the old methods for computing regulatory net worth ratios which had, in effect, permitted a savings institution to meet its nominal three percent capital requirement while in fact leveraging its liabilities to net worth at levels 20 times greater than 33 to 1. These provisions were incorporated in the net worth calculations at a time when the industry was overwhelmingly mutual in form and forced to accumulate net worth by the slow process of additions to retained earnings. Finally, in response to excessive growth, the regulation imposed a permissive growth threshold of 25 percent a year; growth at higher ratios now must be earned, i.e., supported by adequate net worth. This rule began the phase-out of the extremely distortive effects of the old 5-year averaging net worth scheme.