Page images

ganizations. The stories that have depicted the bank's management crying over the lack of a market are a libel on the church, community, labor and cooperative organizations which worked so hard on the efforts to create and maintain this bank.

The bank needs to get off its derriere and start meeting its developmental responsibilities in a rational, consistent, and businesslike manner that can be understood nationwide.

The developmental tasks might be a little easier if the bank encourages, through policies and procedures, a wider informed participation by cooperatives rather than adopting approaches which frustrate and turn off potential supporters.

The board and management must realize that they are caretakers for the miembers of the bank, and for the co-op movement, and they must take hardnosed positions in making sure that they have the right people in the right spots with the right credentials. When changes must be made, they must be made quickly and firmly and at least expense

the members of the bank, as well as the taxpayers. If someone is not performing, they should be thanked for their efforts to date and released. I can see no reason why anyone should be bought out of a position. Compassion and good thoughts cannot be a substitute for competence at this bank. However, it is necessary that competence be supplemented by an understanding of the cooperative movement and of the meaning of title II.

The board and management of the bank will be here tomorrow, and I will repeat this message. This committee intends to continue this oversight, and to do whatever may be necessary to make certain that all the necessary changes are made and this bank is put on the track again. This is not to be a quickie, soon-to-be-forgotten effort by this committee, of that all parties may rest assured.

Our first panel of witnesses this morning is from the General Accounting Office. I am told we have J. Dexter Peach, Director of Resources, Community and Economic Development Division; Robert E. Allen, Jr., Senior Group Director; Paul K. Elmore, Senior Evaluator.

In addition, Mr. Andrew Kilgore will be available to answer any questions on the financial audit that was distributed last week.

And Mr. Richard Kasdan, Senior Attorney for the General Accounting Office is also present.

Mr. McKINNEY. Mr. Chairman, I applaud the chairman of the committee for having these extensive hearings on the bank.

As the chairman is well aware, the hours that he and I put into this effort and our landslide victory of one vote to create this bank are testimony to our conviction. I think it is worthwhile though, for the record, to state that the reason we created the co-op bank was because we found out that the regular banking industry neither understood nor wanted to understand the cooperative movement; nor did we find any of them willing to move with any kind of assurance into the somewhat weak capital positions of the average co-op.

Therefore, though it is called a bank, I think it should be remembered that it was to be a very different bank. To apply the same rules to it that we apply to the very banks that would not, in fact, help the cooperative movement would be somewhat of a mistake. At the same time though, Mr. Chairman, I would agree totally with you that this is no excuse for the bank to be poorly managed, too generous with the legal community of the District of Columbia, and other things of that sort.

I certainly see no reason whatsoever for the buy out of past employees. But I do think it is important in the continuing oversight of this bank to remember that the chairman, myself, and the ranking member, Mr. Wylie, worked so hard on this legislation because we wanted to create a new type of entity.

I would have to say to the regulators that to view this bank under the same or through the same set of glasses that they view other banks would be a terrible mistake on their part.

Congress fully intended this to be a different type of financial institution. One of the reasons for these hearings, I would suggest, is that we are, in fact, somewhat discouraged over the fact that it hasn't been different enough. I would have to say that that is the fault of the present administration for forcing this Congress to set this bank financially adrift far too soon in its history.

I so expressed this at the time that the administration came forth with its ideological stance on the cooperative movement and the cooperative bank.

I still believe we did the co-op bank a great disservice by breaking it free so soon.

I thank the chairman for the time.

Chairman ST GERMAIN. I thank the gentleman not only for his remarks, but for all of his efforts over the years on behalf of the co

op bank.

As I readily acknowledge with gratitude the assistance that he and the ranking minority member, Mr. Wylie, have given in this effort, their efforts have been Herculean. We are on the same wave length.

Yes, it is a different type of institution, but it is an institution nonetheless that has to meet certain criteria in order for it to remain stable.

In addition to that, the Chair is disappointed in the direction that the bank has had in its formative years. Obviously there was a lack of dedication to the cooperative movement and what it stands for by some of the people who were responsible for the day-to-day operations.

So that is one of the reasons that I am very, very saddened at this point in time. I hope that the people at the bank now are getting the message that we are very serious.

We want the bank to succeed, but we are going to make them toe the line; we are going to look for competence and efficiency and efficacy.

We are going to look for a dedication to the principles of the cooperative movement and for a carrying out of the mandate of title II.

Sorry to delay you so long, gentlemen. Many, many hours, weeks, months of effort have been put into this. We are very, very saddened by what has occurred.

We will hear from the GAO. Your entire statement will be put into the record.


COMMUNITY AND ECONOMIC DEVELOPMENT DIVISION; ROBERT E. ALLEN, JR., SENIOR GROUP DIRECTOR; PAUL K. ELMORE, SENIOR EVALUATOR; ANDREW KILGORE; AND RICHARD KASDAN, SENIOR ATTORNEY, ALL OF THE U.S. GENERAL ACCOUNTING OFFICE Mr. PEACH. Thank you, Mr. Chairman. I might also say at the outset that I have at the witness table Mr. Richard Kasdan, a senior attorney in our Office of General Counsel who will also be prepared to respond to questions when we get to that part of our testimony.

Your opening statement alluded to the changes made in August 1981 with respect to the bank and its manner of establishment. Those changes, coupled with controversial organizational changes in June 1981 and a large turnover of bank employees through dismissals, resignations, and job abolishments have had a negative impact on the bank.

This is reflected in a low quality loan portfolio as reported by the Farm Credit Administration, negative publicity and charges of wrongdoing, low employee morale, and a disillusioned cooperative community.

At your request, Mr. Chairman, we reviewed the bank's operations from inception concentrating on title II nonloan activities, regional operations, the 1982 process for electing nine board members, the contracting process, the organizational structure, communication methods, personnel matters, conflict-of-interest policies, and the legality of one loan.

We reported separately on the legality of a $5.2 million loan to the Dunbar No. 1 Cooperative Housing Corp. and the adequacy of the bank's conflict-of-interest policies by letter dated December 16, 1982.

We have now completed our field work on the remaining items and are in the process of preparing our draft report which we expect to furnish to the bank for formal comment in the near future. At this time I will briefly summarize our preliminary findings and conclusions.

The bank continues in a transitional phase. Under the 1981 amendments the bank is setting up a nonprofit corporation to administer assistance primarily to new, developing, and low-income cooperatives.

Also, the bank recently reorganized, unifying its lending process, closing three of its regional offices, and converting two others to branch offices.

We believe that these actions should improve the delivery of financial assistance to cooperatives, increase administrative effectiveness, and reduce operating costs.

However, reducing the number of regional offices and regional staff will limit the bank's ability to develop cooperatives nationwide.

Statements made to us or in public by key bank officials indicate that the number of creditworthy cooperatives available to do business with the bank is limited. Although one of the bank's objectives is to help develop financially sound cooperatives, it cannot now demonstrate that it will be capable of developing the number of cooperatives needed to make enough sound loans to allow the bank to mature into a viable organization.

Beginning in 1990, the bank is required to pay the full interest cost on its $184 million Treasury notes unless the Secretary of the Treasury defers such payments.

Also, between 1991 and 2020 it must repay that loan.

The original act established a self-help office to loan to less creditworthy cooperatives and administer developmental and outreach activities.

Until December 1982, the bank maintained a separate self-help office on paper, but that office was effectively eliminated in the June 1981 reorganization.

Since that time, the bank has continued to decrease the emphasis given to the title II nonloan activities, such as technical assistance to nonborrowers, Outreach, and training.

Under the 1981 amendments, a separate nonprofit corporation was incorporated in the District of Columbia on December 30, 1982, to administer the title II programs. The new corporation may help restore visibility to cooperative developmental and outreach activities if it secures necessary funding.

While the corporation may receive tax deductible contributions from several sources, such as foundations, churches and pension funds, it will probably rely largely on a bank subsidy.

While the bank has stated a willingness to support the corporation, the extent to which it will be able to do so will depend on its ability to mature into a viable organization.

In relationship to the responsibilities assigned to regional offices and the territory to be covered by each, the bank had limited professional staff in its regions and the situation has become more limited.

The regional offices are responsible for primary contact with cooperatives, conducting business development activities, developing and analyzing loans, managing loans, and providing technical assistance.

Before the April 1983 reorganization, the 8 regions had from 2 to 6 professional employees to cover from 3.5 to 12 States. For example, the Minneapolis regional office had 2 professionals to service 8.5 Midwestern States and the Atlanta office had 2 professionals to service 12 Southeastern States.

The New York regional office, which had the six professionals, including a regional director, 2 loan officers, 2 loan development officers, and a credit analyst, was responsible for servicing five States, Puerto Rico, and the Virgin Islands.

The bank's April 1983 reorganization, which abolished 3 of the 8 regional offices, converted 2 others to branch offices, and terminated 23 positions, will further limit the bank's regional capabilities.

Chairman ST GERMAIN. May I interrupt for a second?

Aren't you essentially saying that for the small co-ops that need a little more than just a loan, but a little technical assistance, et cetera, the closing of these regional offices certainly compounds the problem that they have had to date, does it not?

Mr. PEACH. We believe it can be a problem. There is certainly a dichotomy between the closing down of the regional offices and the

[ocr errors]

efforts related to trying to maintain the technical assistance and help to cooperatives and create the kind of outreach program to develop the cooperative community which is a part of the bank's charter.

Chairman ST GERMAIN. Certainly the reason for this purportedly is to save money, is it not?

Mr. PEACH. That is correct.

Chairman ST GERMAIN. Did you perchance look at some of the bonuses awarded the personnel of this bank in the years 1981 and 1982 and 1983?

Mr. PEACH. We are aware of the bonuses that were awarded. We did not look at those in detail. We are aware of the fact.

Chairman ST GERMAIN. Let me reel them off to you:

For 1981, Carol Greenwald, $10,000; Margaret Cheap, $5,000; Mitchell Rofsky, $5,000; Leslie Porter, $5,000.

For 1982: Carol Greenwald, $17,000; Leslie Porter, $3,000; Margaret Cheap, $3,000; Mitchell Rofsky, $15,000.

Now, the performance of the bank, don't you usually give a bonus to people who are running an institution, a business, what have you, because that institution is really going great guns and fulfilling its mission? Isn't that the reason for a bonus?

Mr. PEACH. That is a general premise, is my understanding.

Chairman ST GERMAIN. In your opinion-I am talking now of GA0—does your analysis include-conclusion lead you to believe the performance here was that sterling that it warranted bonuses over and beyond the salaries?

Mr. PEACH. In this case, I can say the board made a judgment. It was the judgment of the board to award the bonuses.

From the reviews that had been done by us from the information we have seen related to other reviews that have been done, there have been a good deal of questions raised as to how well the bank has performed over this time.

If you look at loan portfolios, questions like that.

Chairman St GERMAIN. This member has read your draft report. It hasn't been completed.

In reading your draft report, I can't see where, if I were-after a review of that, I would find it very difficult to justify a bonus for a job well done.

Do you disagree?
Mr. PEACH. No, I don't disagree, Mr. Chairman.
Chairman ST GERMAIN. You may continue.

Mr. PEACH. As you indicated, the bank's changes were made to reduce operating costs but it was made at the same time it was facing these difficult tasks of developing creditworthy loans and providing technical assistance to and addressing development needs of cooperatives.

Turning to the area of contracting procedures, during its first meeting in September 1979, the bank's board of directors adopted an interim procurement policy to guide the bank during its initial organizational efforts. While the policy was brief, it did base contract awards on competition whenever practical.

From inception the bank has not fully complied with its contracting policies and procedures.

« PreviousContinue »