Mr. ROWLAND. Mr. Chairman, I have no additional questions here, so I assume that we are through with this witness. Does counsel have any questions? Mr. MONTGOMERY. Just a couple of questions, Mr. Chairman. Mr. Henry, you mentioned that you had invested in a couple of these partnerships; is that correct? Mr. HENRY. Correct. Mr. MONTGOMERY. What was your stake in those? Mr. HENRY. Two, $5,000 investments. Mr. MONTGOMERY. What was the average stake of one of your clients in these partnerships? Mr. HENRY. Typically, $5,000 to $10,000. Mr. MONTGOMERY. We really are talking truly small investors; would that be a fair statement? Mr. HENRY. That's a fair statement. A $25,000 investment would have been considered at least in our client base an abnormal investment. We would have diversified the clients in other programs instead of putting that much money in one. Mr. MONTGOMERY. Do you believe Mr. Levan plans to continue to rollup these limited real estate partnerships? Mr. HENRY. As long as they allow him to do it. I am thinking about a new career. If this is legal-if I can take somebody else's $46 million and trade them paper for $3.6 million it sounds like an interesting possible another line of work that we all ought to look into if it's legal. I don't think it should be if it is. Mr. DINGELL. You might even come out better than Willie Sutton and wouldn't have to go to jail. Mr. HENRY. Yes, I agree. Mr. MONTGOMERY. Thank you. Thank you, Mr. Chairman. The next panel is the Honorable T. Timothy Ryan, Jr., Director of the Office of Thrift Supervision, Department of Treasury and James R. Doty, Esquire, General Counsel, Securities and Exchange Commission of Washington. Gentlemen, you have in front of you the copy of the rules of the Subcommittee on Oversight and Investigations and a copy of the rules of the Energy and Commerce Committee. It is customary for witnesses here to be represented by counsel if they so desire. Do you desire representation by counsel? Mr. DoTY. No, sir. Mr. RYAN. No. Mr. ROWLAND. It is customary for the witnesses to be sworn. Do you have any objection to being sworn? Mr. Doty. None. Mr. RYAN. No. [Witnesses sworn.] Mr. ROWLAND. You may consider yourself as being sworn. Mr. Ryan, you may proceed first with your statement. TESTIMONY OF T. TIMOTHY RYAN, DIRECTOR, OFFICE OF THRIFT SUPERVISION, DEPARTMENT OF THE TREASURY, ACCOMPANIED BY HARRIS WEINSTEIN, CHIEF COUNSEL; AND JAMES R. DOTY, GENERAL COUNSEL, SECURITIES AND EXCHANGE COMMISSION Mr. RYAN. Thank you very much, Mr. Chairman and members of the subcommittee. I appreciate the opportunity to testify today on the rollup process of certain real estate partnerships by BankAtlantic Financial Corporation. Joining me today to my left is the Chief Counsel of OTS, Harris Weinstein. First, I would like to discuss the role of the Office of Thrift Supervision in the matters being discussed today. As you are aware, OTS is the primary regulator of federally insured savings associations and the primary supervisor for BankAtlantic Federal Savings Bank, a subsidiary of BankAtlantic Financial Corporation. We are charged with insuring the safe and sound operation of the insured thrift. Our mission is to protect the American taxpayers by keeping savings and loans such as BankAtlantic Federal Savings on solid footing. Our authority to examine rollup transactions from the standpoint of investor protection was and is minimal. A major responsibility of the OTS in these transactions was to ensure that BankAtlantic Financial Corporation would not be motivated to milk the capital and assets of its subsidiary thrift and thus, put the taxpayers at risk to service the debt it issued. Since the issuer in this case is a publicly traded holding company, the SEC rather than the OTS, had disclosure jurisdiction over the issuance of the securities under the Securities Act of 1933. Even though it is not within our jurisdiction we are concerned about the investor protection issues raised by you and your staff. That is why we used our supervisory authority to direct the Board of Directors of BankAtlantic Federal to retain independent outside counsel to investigate the rollup transactions under discussion today. We expect to receive a report in due course. I am able to report that the taxpayer is not at risk. The debt issued by BankAtlantic Financial Corporation has a term of 20 years and pays interest at a rate of 8 percent for the first year, 9 percent for the second, and 10 percent thereafter. BankAtlantic Financial has been able to remain current on all required interest payments without having to call on the capital, assets or a steady stream of dividends from its subsidiary thrift. The staff of this subcommittee has expressed concern that BankAtlantic Financial Corporation initiated the rollup transactions because it was or is under pressure to raise money to prop up its thrift institution. Accordingly, I would like to briefly address the financial condition of the thrift during the relevant period. As a result of aggregate losses of $17.8 million during the 3 year period that ended December 31, 1990, the thrift failed its applicable capital requirements at year end 1990. At that time it failed its core capital requirement by $5 million and its risk-based capital requirement by $3.3 million. However, by March 31, 1991, the thrift was able to resolve these capital deficiencies largely through the strategic downsizing of its balance sheet and the issuance by the thrift of $8.4 million in preferred stock. BankAtlantic Financial Corporation acquired none of this preferred stock, nor did it contribute any money to assist the thrift in resolving the December, 1990 capital deficiency. The thrift's public filings indicate that as of March 31, 1991, the thrift exceeded all of its capital requirements and the thrift earned a profit of $141,000 for the quarter ended March 31, 1991. OTS was concerned about losses in the 1988 to 1990 period, and continues to monitor the financial condition and operations of the thrift very closely. In addition, the thrift recently entered into a supervisory agreement with the OTS in which it agreed to strengthen operating policies, procedures and controls. OTS is diligently monitoring compliance with this agreement. Since acquiring BankAtlantic Federal Savings Bank in 1987, BankAtlantic Financial Corporation has directly infused into the thrift $7.4 million in permanent equity capital. This was accomplished in two transactions. First, the holding company acquired 430,000 shares of the thrift stock in October of 1989 for an aggregate purchase price of $4.9 million in connection with a rights offering of stock and warrants made to all existing thrift shareholders. Second, the holding company purchased $2.5 million of thrift subordinated debentures in a private placement during March of 1990, and subsequently exchanged this subordinated debt for common stock. In short, although BankAtlantic Federal Savings Bank has presented financial issues over the years, it has $58.9 million in tangible capital. It is incorrect to characterize the bank as an institution near insolvency. It is also incorrect to assert that BankAtlantic Financial Corporation has infused an unusually large amount of capital into the thrift since acquiring it. It has infused some $7 million in capital, not an inordinate sum. Frankly as a regulator, we believe it is quite positive from the taxpayer perspective to see the holding company make additional capital injections. We are aware, Mr. Chairman, that you have long been concerned about possible modifications of the Glass-Steagall Act, and particularly you have expressed your view of the possible risks of permitting banks to affiliate with organizations principally engaged in securities activities. The activities undertaken by BankAtlantic Financial Corporation do not appear to be Glass-Steagall matters. The Federal Reserve Board has said that the Glass-Steagall Act does not preclude a bank from affiliating with a firm that issues securities to finance its real estate investment, development and management business. While we appreciate your concern about the role of Glass-Steagall in protecting against risks that may arise when banks and securities firms affiliate, the activities here do not appear to be subject to the Act. Nevertheless, Mr. Chairman, what is relevant here is another area that concerns you, the mixing of banking and commerce. It is true that the current relationship between BankAtlantic Financial Corporation and its thrift subsidiary would not be possible for banks under current law. Such an ownership arrangement between a bank and a real estate syndication and development company is prohibited by the Bank Holding Company Act. Because I believe that this hearing raises several important issues relating to the mixing of banking and commerce, I would like to address this area. As you are aware, Mr. Chairman, the administration has proposed to allow banks to affiliate with a broad range of financial firms through the formation of financial services holding companies. Commercial banks would in turn be permitted to own these new financial service holding companies. Many people have expressed reservations about this proposal. There is concern, for example, that commercial companies might influence the bank affiliates to make biased and unsound allocations of credit to commercial affiliates. Some have said that commercial companies might milk the assets of their affiliated banks. Others have questioned the ability of bank regulators to supervise the bank in the framework proposed by the administration. While I understand these concerns, I believe they are unfounded. None of the hypothetical problems of combining banking and commerce have been evident among the commercial companies that currently own insured financial institutions. Let me elaborate. It is important to emphasize that what the administration is proposing is not untested. Federal law has long permitted financial services companies, including securities firms and insurance companies and commercial corporations to own thrifts. The OTS has substantial experience in regulating and supervising commercial and industrial companies that are also savings and loan holding companies. At present, 28 commercial companies own savings associations including such companies as the Weyerhaeuser Corporation, ITT Corporation, MacAndrews and Forbes, Temple Inland, Westinghouse Corporation, Sears Roebuck Company and Ford Motor Company. At least 150 financial services oriented companies own savings associations. Major examples include Citicorp, Household International, Inc., Prudential Insurance Corporation and H.F. Ahmanson. In aggregate, affiliations between thrifts and commercial and financial services companies have been beneficial, not detrimental to the safety and soundness of savings associations. Our experience with commercial and industrial thrift holding companies has been very positive. A prime benefit of commercial and industrial firm ownership of thrifts has been the ability of these firms to inject significant amounts of additional capital into their thrifts. Such capital infusions decrease taxpayer exposure on a dollar for dollar basis. Despite concerns to the contrary, there is no evidence that funds of these infusions have been obtained by means abusive to the shareholders of commercial companies. A second important benefit is in the business acumen and pool of managerial talent provided by these holding companies to thrift institutions. We have compiled some aggregate figures that may be of some interest to the subcommittee. For example, the amount of thrift assets held by these institutions represents 7.93 percent of the total industry assets. Industry assets today are close to $1 trillion. To date, not a single one of the savings associations controlled by these companies has had to be sent to the RTC to be resolved at taxpayer expense. By our estimates, during the 1980's and primarily since 1985, these commercial and industrial holding companies infused at least $1.5 billion into the thrift industry in acquiring savings associations and continued to infuse an additional one billion in capital after acquiring these thrifts. This represents money that did not have to be taken out of the pocket of the taxpayers. My written statement cites several different specific examples that illustrate these points. One recent transaction involves First Federal Savings and Loan of Rochester, New York, an institution that was clearly in troubled condition in 1991. In a transaction not involving government assistance, the thrift was acquired by CT Financial, a major financial services firm that is ultimately controlled by BAT Industries, a diversified commercial corporation headquartered in the U.K. As part of this acquisition, CT Financial immediately infused $188 million in new capital into the thrift, bringing the thrift into compliance with all of its fully phased-in capital requirements. This badly needed capital infusion would not have been possible had the law prohibited affiliations between thrifts and commercial companies. Moreover, the acquirer in this case has the financial and managerial resources to support the thrift going forward. Thus, the taxpayer is protected. Our experience with commercial and industrial firms affiliating with thrifts has been entirely positive. Such affiliations have provided an important source of fresh capital, brought significantly increased management expertise to the thrift business, and fostered improved, profitable business strategies. The American taxpayers have been saved several billion dollars and the American consumers have benefitted from improved thrift operations. The administration's proposal would bring like advantages to the Nation's banks. We believe the administration proposal is carefully structured to achieve these goals in a manner that is entirely consistent with the principles of safety and soundness. In fact, I believe that the proposal is even more stringent in its paramount orientation toward taxpayer protection than is current law. Again, in the interest of time, I would refer you to my written statement for more detailed discussions of the Administration's proposal. In conclusion, Mr. Chairman, I appreciate the opportunity to appear here before you today. I want to assure you that the OTS will not hesitate and, in fact, has not hesitated to take the necessary supervisory actions against thrifts owned by commercial and industrial firms to ensure that regulatory violations are corrected and that the safety and soundness of the thrift is maintained. Should this subcommittee or its staff investigators have specific facts indicating violations of our rules by BankAtlantic Financial Corporation, its thrift, or any of its employees, such information should be forwarded to us immediately. I can assure you that we will take action. I know that we share the same goals, to ensure that financial services reform protects the taxpayer, benefits the consumer, is fair to investors, and enables our financial service companies to compete effectively in the world. I believe that enacting the pending |