January 24, 1997
Honorable Ricki Helfer
Federal Deposit Insurance Corporation
550 17th Street NW
Washington, DC 20429
RE: Clyde Federal Savings and Loan Association and House Judiciary Committee Chairman Henry Hyde
Dear Chairman Helfer:
We are writing to ask you to reconsider the Federal Deposit Insurance Corporation's (FDIC) proposed settlement with the directors of Clyde Federal Savings and Loan Association ("Clyde"). According to news reports, the settlement proposal would allow U. S. Representative Henry Hyde (R-IL), Chairman of the House Judiciary Committee, to escape paying any damages arising from his practices on Clyde's board of directors (see Appendix A). Taxpayers deserve to know why the FDIC has proposed to settle the Clyde case without requiring any payment from Chairman Hyde, and without undertaking thorough pre-trial discovery. How can the FDIC justify settling this case, which involves a powerful elected official, without conducting thorough pre-trial discovery?
Chairman Hyde joined the board of directors of Clyde Federal Savings and Loan Association of North Riverside, Illinois in December, 1981, while he was serving in the United States Congress. Chairman Hyde had been a member of the House Committee on Banking. He served on Clyde's board until July, 1984. This was a period of deregulation in the savings and loan industry, following the passage of the Garn-St. Germain Depository Institutions Act of 1982. Bank and thrift institution directors should have been especially watchful and vigilant during this time as new and perilous avenues of investment were opened to them.
The Office of Thrift Supervision (OTS) ordered Clyde into receivership on February 1, 1990, and appointed the Resolution Trust Corporation (RTC) as receiver. The ensuing bailout of Clyde cost the taxpayers approximately $67 million dollars. The RTC brought a civil action against Chairman Hyde and 11 other members of Clyde's board in April, 1993. The RTC suit sought damages of $17.2 million based on claims of negligence, gross negligence, breach of fiduciary duties, and breach of contract with Clyde by Chairman Hyde and Clyde's other directors. In December, 1995, U.S. District Court Judge Brian Duff dismissed several of the RTC's claims, but allowed the gross negligence claim to proceed.
On November 19, 1996, the Federal Deposit Insurance Corp. (FDIC), which had assumed responsibility for the Clyde case from the RTC, annnounced a proposed $850,000 settlement with Clyde's directors. In response to the settlement proposal, Chairman Hyde stated that "I have not agreed nor will I agree to make any payment in settlement of this case."(1)
The FDIC has declared that it has no interest in the apportionment of damages among Clyde's directors. But this is plainly untrue. The FDIC has a great interest in establishing incentives that encourage board members to adopt safe and sound banking practices. Bank directors are jointly and severally liable for bank losses or failure, where and to the extent they have failed to meet applicable standards of care. But in the Clyde case, the FDIC has indicated that it is willing to settle for a joint liability of $850,000, irrespective of the several liability of each board member, including Chairman Hyde.
December 16, 1996 was supposed to be the deadline for a final settlement between the FDIC and Clyde's directors. The proposed settlement was to be approved by U.S. District Court Judge George Marovich. But the FDIC and Clyde's directors were unable to reach final agreement on December 16th. Judge Marovich has required the parties to return to court on January 28, 1996.
Because Henry Hyde is a member of Congress, and the Chairman of the
House Judiciary Committee, his conduct must be held to a higher standard,
and should receive a heightened level of review. Members of Congress should
avoid even the appearance of impropriety. The public should be able to
scrutinize all of the records in the Clyde case to determine whether Chairman
Hyde's conduct meets this standard. Chairman Hyde has repeatedly claimed
that he is free of any wrongdoing in the case. If so, then he should welcome
placing all Clyde materials in the public domain in an effort to clear
his own name.
A: Questions Remaining in the Clyde Case, and Policy Implications of Exonerating Chairman Hyde
Why has the FDIC proposed to settle the Clyde case without undertaking thorough pre-trial discovery? Why is the FDIC confident that it has all of the materials in its possession necessary for a review for all possible civil and criminal liability in the case?
Clyde falls into a curious pattern of unusually low levels of prosecutorial activity in Illinois RTC cases. According to a General Accounting Office (GAO) report on thrift failures, 24% of all RTC thrift institution cases nationwide spawned a criminal case. In some states, the percentage was much higher. For example, in Florida, of 46 RTC thrifts, 20 had at least one criminal case associated with the thrift, or 43% of all RTC Florida thrifts. Yet, in Illinois, only 3 of 48 RTC thrifts had an associated criminal case, or 6% of all Illinois RTC thrifts. That is one-fourth of the national prosecution rate for RTC thrifts. Illinois had the lowest prosecution rate of any of the 22 states with over 10 RTC thrifts.(2)
It is important that the FDIC explain its reasoning behind settling the Clyde case for merely $850,000 at this late juncture. Otherwise, the FDIC might provide indirect evidence to support the thesis of prosecutorial lassitude in cases against Illinois savings and loan directors. Nevertheless, the American people deserve a full and thorough explanation of why this pattern exists in Illinois, and what might be done to remedy the pattern.
The gross negligence case against the twelve members of Clyde's board has withstood substantial scrutiny. Taxpayers deserve to know why it is acceptable for the FDIC to settle for only $850,000 -- which is not much more than the federal government's legal expenses and the cost of conducting the investigation of Clyde. Taxpayers deserve to know why the FDIC apparently will not require all of Clyde's directors to pay at least some amount to the FDIC.
Has Chairman Hyde used his position as Chairman of the House Judiciary Committee to escape responsibility in the civil suit against him and Clyde's other directors? When the FDIC settles with a prominent elected official, shouldn't it provide the public a more thorough explanation regarding the process, legal reasoning, and findings of the case? It would be unacceptable for the FDIC not to insist that Chairman Hyde explain his business dealings. Furthermore, it is important that the public record accurately reflect the personal responsibilities of Henry Hyde and the other members of the board of directors in the Clyde's failure.
Finally, the FDIC should explain why Chairman Hyde should escape personal responsibility for his actions as a director of Clyde Federal Savings and Loan. The FDIC and the taxpayers have a strong interest in the apportionment of damages and liability in this case. The FDIC's collection of damages in negligence cases provides a powerful incentive for directors of savings and loans to avoid unsafe and unsound banking practices. These incentives protect insured funds and the taxpayers. The cost of undercutting these incentives may be extremely high to taxpayers. We urge you not to undermine any incentives deterring S&L directors from engaging in unsafe and unsound banking practices.
Bank and thrift institution directors are responsible for ensuring that safe and sound banking practices are adopted and scrupulously followed. They are responsible for ensuring that their institution obeys federal banking laws and guidelines.
The full record of Clyde's business activities is not publicly available during the period when Chairman Hyde was a member of Clyde's board. Aggressive discovery in the Clyde case should focus, at a minimum, on the following matters:
Options Trading. At a Clyde board meeting on September 26, 1983, Chairman Hyde seconded a motion to initiate a "portfolio yield enhancement" strategy which involved the use of options transactions.(3) According to the RTC, this options trading did not comply with federal guidelines for thrift institutions. According to the RTC complaint, "No one on Clyde's Board or employed by Clyde had any prior experience in this speculative activity in 1983."(4) In the absence of such expertise, investing in the treacherous arena of options trading was highly imprudent, if not reckless. The RTC complaint states that "Clyde experienced losses in excess of $10 million from options trading."(5)
Purchase of Grand Cayman CD's from Swink & Company. At a Clyde board meeting on May, 17, 1982, Chairman Hyde seconded a motion to approve purchase of securities from Swink & Company ("Swink"), a securities firm in Little Rock, Arkansas. Some of the securities purchased included "2,875,000.00 EURO Dollars issued by First National Bank of Minneapolis, Grand Cayman Branch..."(6)
Did the FDIC ever investigate the strange circumstances of this Illinois S&L's involvement with Grand Cayman CD's, which could conceivably involve money laundering activities? If not, why not?
The October 18, 1982 meeting of Clyde's board indicates that the directors were purchasing from or selling more securities to Swink.(7) Swink was a small Little Rock securities firm with a long history of securities law violations. On November 30, 1984, Swink was fined $50,000 by the National Association of Securities Dealers (NASD) for failing to maintain adequate net capital, making false statements in an advertisement, and other violations. On February 21, 1984, the U.S. District Court in Little Rock permanently enjoined Swink from further violations of Securities and Exchange Commission (SEC) rules regarding net capital requirements, record-keeping, and other rules. In 1989, Forbes magazine reported that "Swink & Co. has had no fewer than 24 municipal bond defaults since 1983, worth in excess of $120 million." Jimmy Dale Swink, Sr., who owned the now-defunct Swink & Co., was barred from the securities business in 1993 after he pleaded guilty to conspiracy to commit securities fraud. Mr. Swink served 21 months in an Arkansas correctional facility.(8)
Why was Clyde was purchasing securities from Swink & Co.? Which of Clyde's directors were involved in giving business to Swink? Did the FDIC ever investigate ties between Swink and Clyde's directors? If not, why not?
Below Market Rate Loans to Directors and Officers. At a Clyde board meeting on September 27, 1982, Henry Hyde seconded the following motion:
RESOLVED, That this Board hereby authorizes and approves the Association making mortgage loans to its Directors, Advisory Directors, Officers, and employees at an interest rate of 2% over the association's cost of funds or % below current market rate at the time of application, whichever is lower. This rate is to be restored to the market rate at the time of application if and when the borrower's relationship with the Association ceases.(9)
Did the FDIC ever determine whether below market rate loans were distributed to Clyde's directors and officers? Could the FDIC make such a determination without conducting pre-trial discovery? If any such loans existed, did any result in losses to Clyde?
Employees' Profit Sharing Plan. At a Clyde board meeting on October 17, 1983, Chairman Hyde seconded a motion to transfer $287,625 from Clyde to Clyde's "Employees' Profit Sharing Plan and Trust."(10) But there was no profit to share; Clyde was not making any profits. In fact, it was losing money quickly. Chairman Hyde and the other members of the board were irresponsible in transferring this money to the Employees Profit Sharing Plan. In effect, the taxpayers have had to replace the money that went to the profit sharing plan. What were the circumstances surrounding this contribution to the Employees' Profit Sharing plan? How much did insiders at the bank gain from this transaction?
Cash Reconciliations. The November 28, 1983 letter from outside auditors Cobitz, Vandenberg and Fenessy to Clyde's board of directors ("Cobitz letter") provides strong evidence of unsafe and unsound banking practices. The section on reconciling cash and related procedures states:
Reconciliations were not prepared on a regular basis, with time lags of up to twelve months being noted in their preparation....Of the completed bank reconciliations reviewed by us, we noted that several were reconciled in an unacceptable manner. One bank reconciliation contained four pages of old reconciling items, some dating over two years old.(11)
Bank and thrift institution directors are responsible for ensuring that safe and sound banking practices are adopted and followed scrupulously. Banks should reconcile cash receipts and disbursements on a daily basis. Two-year reconciliations are evidence of slipshod oversight, and unsafe and unsound banking practices.
Aransas Princess Loan. At a board meeting on February 27, 1984, Clyde's directors voted unanimously to approve purchase of $5 million of the $28.5 million loan to build the Aransas Princess luxury condominium project in Port Aransas, Texas.(12) According to the RTC complaint "Clyde lost in excess of $3.7 million on the Aransas Princess loan."(13) The lead lender of the Aransas Princess project was Guaranty Savings and Loan of Harrison, Arkansas.(14) According to the RTC, Clyde's board had no experience in out-of state construction lending. The RTC complaint alleges that Clyde's board "relied upon information provided and analyzed by a broker who stood to receive a substantial fee"(15) if the loan was approved.
The broker for the Aransas Princess loan was J. William Oldenburg, who had been charged with defrauding a Salt Lake City savings and loan of $25 million. In 1974, the SEC accused Oldenburg of fraud, but the case was settled with a consent order.(16)
Taxpayers deserve to know why did Clyde decided to do business with William Oldenburg. Which of Clyde's directors were involved in giving business to Oldenburg? Did the FDIC ever investigate ties between Oldenburg and Clyde's directors? If not, why not?
Irrespective of this, the FDIC does know that Clyde suffered a $3.7 million loss from this loan. The FDIC should explain to the public why it proposes to collect merely $850,000 in damages from the entire Clyde case, including this loan, and why Chairman Hyde will apparently not be required to reimburse the taxpayers for losses arising from the loan.
Lake Jackson Loan. At a February 27, 1984, board meeting, Clyde's directors voted unanimously to approve 90% participation in an $8.3 million loan with the American Savings and Loan of Lake Jackson, Texas.(17) Neither Clyde's directors nor its management had the necessary expertise to prudently engage in such out-of-state lending.
Student Loans. The Cobitz letter states that "it appears that the association [Clyde] is overcharging the government for interest"(18) on student loans. Chairman Hyde should have been acutely sensitive to this issue because he is a member of Congress and a former member of the House Banking Committee. Did the FDIC ever investigate Clyde's apparent bilking of the taxpayers by overcharging the federal government for interest on student loans? If not, why not?
Service Corporations. The Cobitz letter indicates that "several
of the [Clyde's] service corporations' books were incomplete and/or prepared
1. Statement of Henry Hyde Regarding Proposed Settlement of RTC v. Lydia Franz, et al. November 19, 1996. See Attachment #1.
2. "RTC Thrift Failures," General Accounting Office, August 10, 1993. GAO/GGD-93-94. Data is from "Summary Information on RTC Thrifts Associated With Civil and Criminal Enforcement Actions, By Jurisdiction." Appendix V, pp. 38-9. See Attachment #2.
3. Minutes of Meeting Held September 26, 1983, pp. 3-4. See Attachment #3.
4. Resolution Trust Corporation v. Lydia Franz, et al. RTC Complaint and Demand for Jury Trial, Paragraph 28. See Attachment #4.
5. Resolution Trust Corporation v. Lydia Franz, et al. RTC Complaint and Demand for Jury Trial, Paragraph 33.
6. Minutes of Meeting Held May 17, 1982, pp.1-2. See Attachment #5.
7. Minutes of Meeting Held October 18, 1982, p.2. See Attachment #6.
8. Lynn Stevens Hume, "SEC Gets Court Order Filed Against Ex-Dealer Jimmy Dale Swink, Sr." The Bond Buyer, April 26, 1995. Attachment #7 also includes Matthew Schifrin, "The Moynihan Ripoff." Forbes magazine, December 11, 1989. Jan Paschal, "NASD Fines Swink $50,000 on Charges of Skimping Capital, Distorting Records." The Bond Buyer, July 5, 1989.
9. Minutes of Meeting Held September 27, 1982, p.4. See Attachment #8.
10. Excerpt of Minutes from October 17, 1983 Meeting, p.1. See Attachment #9.
11. Correspondence from Cobitz, Vandenberg & Fennessy to the Board of Directors of Clyde Federal Savings and Loan, November 28, 1983. pp.4-5. See Attachment #10.
12. Minutes of Meeting Held February 27, 1984, pp. 2-3. See Attachment #11. Board minutes indicate that Chairman Hyde attended Clyde's February 27, 1984 board meeting.
13. Resolution Trust Corporation v. Lydia Franz, et al. RTC Complaint and Demand for Jury Trial, Paragraph 40.
14. Elaine Hopkins, "Hyde Sued for Role in S&L Failure." Peoria Journal-Star, May 8, 1993. Attachment #12 also includes Bruce Rubenstein and David Rubenstein, "Did Protection Racket Shield Local S&L's?" Illinois Legal Times, August, 1996.
15. Resolution Trust Corporation v. Lydia Franz, et al. RTC Complaint and Demand for Jury Trial, Paragraphs 35, 36, 38.
16. Elaine Hopkins, "Hyde Sued for Role in S&L Failure." Peoria Journal-Star, May 8, 1993.
17. Minutes of Meeting Held February 27, 1984, p. 4. Board minutes indicate that Chairman Hyde attended Clyde's February 27, 1984 board meeting.
18. Cobitz letter, p. 6.
19. Cobitz letter, pp. 7-8.