Obligations Limitation

GAO is reporting quarterly on the Resolution Trust Corporation's (RTC) compliance with the maximum obligation limit set forth in the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. This legislation established a formula for calculating the maximum allowable obligations outstanding and provided $50 billion in financing to resolve troubled thrifts placed into conservatorship or receivership from January 1, 1989, through August 9, 1992. On the basis of its review of RTC's June 5, 1991, report and table and its financial records, GAO determined that none of the categories for the formula required by the act was omitted from RTC's calculation and that the reported values appeared reasonable for selected components of the calculation. However, as in its third quarter report, RTC did not include $18.8 billion of Treasury Department funding when calculating its fourth quarter adjusted obligation level. Had RTC included the Treasury funding in its calculation, the fourth quarter adjusted obligation level would have been about $1.7 billion over the $50 billion provided by the act, and RTC would have been precluded from incurring any additional obligations. The accuracy of RTC's obligation limit calculations is highly dependent on the reasonableness of the estimated fair market value of its assets. Until RTC gains enough experience in selling real estate and troubled loans secured by real estate, GAO has no basis to assess the reasonableness of its estimated recovery values. The obligation limit formula as originally implemented provided cash reserves to cover possible future losses due to overvaluation of RTC's assets in receivership. GAO continues to support the recommendation made in its third quarter report that Congress consider reestablishing the cash reserve feature by amending the obligation limit formula established by the act to include all funding sources.

GAO found that: (1) as in the third-quarter report, RTC did not include $18.8 billion of the Department of the Treasury's funding when calculating its fourth-quarter adjusted obligation level; (2) as a result of this change in methodology, the adjusted obligation levels calculated in the first and second quarters are not comparable with those calculated in the third and fourth quarters; (3) if RTC had included Treasury funding in its calculation, its fourth quarter adjusted obligation level would be about $1.7 billion over the $50 billion provided by FIRREA and RTC would be precluded from incurring any additional obligations; (4) until RTC has sufficient experience in selling real estate and troubled loans secured by real estate, no basis exists to assess whether its estimated recovery values are reasonable, since the amounts recovered from asset sales are dependent on the behavior of commercial and other real estate markets; (5) the obligation limit formula provided cash reserves to cover possible future losses due to overvaluation of RTC assets in receiverships; (6) the obligation limit's cash reserve feature serves as a valuable safeguard against the RTC need to request additional loss funds from Congress to repay working capital; and (7) GAO continues to support its previous recommendations that Congress consider reestablishing the cash reserve feature by amending the obligation limit formula established by FIRREA to include all funding sources.