Senator D'AMATO. Thank you very much, Mr. Chairman. I think you have really touched on the most important areas. Pursuing the Chairman's line of questioning, Mr. Fiechter, how important do you view the economic incentives for management in stimulating the conversion process, and would the provision in our bill, the 1-year delay, inhibit or stop the conversion process, in your opinion?

Mr. FIECHTER. I think, Senator, that we could scale back the kinds of compensation that have crept into the process the last couple of years, without inhibiting the conversion process from going forward. I really do compliment you all in terms of forcing us to focus on this issue. We didn't have what we call management recognition programs, the benefits going to management at the time of conversion.

They have crept in, in the last 4 or 5 years, and I think that the direction, as I understand the proposal in your bill-which is both to give the new owners of the institution more of a say in what kind of compensation and to design systems that reward good management for staying and doing well going forward as opposed to rewarding management for past years of service-has a lot of merit. Senator D'AMATO. So you don't see the 1-year waiting period after the conversion before allowing the shareholders to vote on these compensation packages or increases as stopping the process? Mr. FIECHTER. I don't think that it will. Again, I want to spend some more time on it, but I agree with that objective, but I also agree, as Chairman Riegle said, that we don't want to stop the process. And so, we have got to scale it back without eliminating it. But if we can, in talking with institutions that have previously converted-and I have talked to some thrifts that are mutuals who have said MRP's, in their view, can be eliminated. They don't think that that is critical.

Senator D'AMATO. Mr. Hove, what do you think?

Mr. HOVE. I would agree.

Senator D'AMATO. Let me touch on something that again I know the Chairman is concerned with, since he brought it up and mentioned it with Mr. Hove, mentioned it with you, Mr. Fiechter, given the fact that our legislation was put in on January 26 and there is that provision which would make the provisions effective as of January 26, it seems to me that any conversions that have or will be approved run the risk of having a situation where they may have to be unwound when and if this legislation is passed.

Have you approved any conversion since the 24th? I don't know if you can detail them now, but certainly, get us that information. Second, is it prudent to proceed with those conversions unless they have addressed the minimums that we have provided in this legislative package? Or do we create just a real tumult, a real problem if indeed-let's just take the area of compensation for the insiders and we find a situation that they have already been rewarded and they have not met the provision we provided?

Would you care to comment on that? It is a convoluted question. Mr. FIECHTER. No, no. I understand fully. I think clearly the counsel to the institutions that have converted, and there have been institutions that have converted since the bill was introduced, had to look long and hard at this. I am not-and this is an off-the

cuff response-I am not certain you have to unwrap the deal. I think it may be that the management compensation might have to be unwrapped, but not the deal itself.

Senator D'AMATO. So let me put it another way. All right. Whatever you have done, it's done. We will have to take a look at it or somebody will take a look at it at some point in time. It would seem to me a much more prudent course of action is not to approve conversions that don't basically meet the limitations, the floor limits that we have placed on. You may want to go further, or some State regulator; for example, New York has, at least the superintendent and I applaud him, I think he did a great job, absolutely great-but they may want to go further. But to at least meet the minimum levels. It doesn't seem to me, Mr. Fiechter, to be prudent.

Care to comment? As I would say, if somebody comes in, he's got this huge economic package, you say, "For God's sake, no, we_are not going to approve this because this runs afoul of what the Congress is contemplating putting in. You are either going to have to wait or you're going to have to scale this back to at least meet those minimum standards." Am I wrong?

Mr. FIECHTER. Let me respond in writing for the record as to that.

Senator D'AMATO. What do you think about that?

Mr. FIECHTER. Again, I think that that is a risk that the institution is running. I am not convinced-or that the management of the institution are running-given that there were conversions arguably that were approved the hour that that bill was introduced. There is a very expensive process involved in getting the applications before us. The bill was introduced at a time when we had a slew.

Senator D'AMATO. I am not talking about those three or four that have gone through or whatever. You are going to respond in writing to that.

I am talking about from this point on, those that haven't been put in there, it would seem to me that you would want to say, "Look, in your approval process," and I am not attempting to micromanage your operation, but it doesn't make sense to me to be letting some guy get some, you know, obviously large package of compensation if it flies in the face of what we are indicating here.

Mr. FIECHTER. No. I think I agree on a going forward basis. Senator D'AMATO. What has happened we will have to try to look at and unravel and see in terms of the law. But I mean, I am saying to you at this point forward, you ought to tell the guy if he says, well, I am going to give the inside people $5 million or $2 million or $10 million or whatever they're going to get, "Wait a second, fellows, we will approve the rest of your plan. It's a perfect plan. But not this. It has to be subject to the stockholders."

It would seem to me that a lawyer, even charging pretty good rates, you go to the best firm over there at 300 bucks an hour or 500 bucks an hour, in about 10 hours could change that part of that package. You know what I am saying? So we are not saying pull out everything; we are talking about specifically this area as it relates to the compensation for the insiders.

I would suggest to you that it seems to me you would be making an error if you are letting this thing go forward, if you let them go forward on that basis.

Mr. FIECHTER. I would like to respond. The difficulty we have is this is an ongoing process, and clearly the Chairman and the Ranking Minority Member of this committee have an awful lot of authority. But as an agency, with a process that we have had for 20 years, if we change the process based on bills that are introduced, and there could be another bill introduced that had a different set of standards, if we change our standards based on every time a bill is introduced with the retroactive, it becomes awfully difficult from an administrative process. And I don't want at all to suggest that I don't give an awful lot of weight to the suggestions that are proposed.

Senator D'AMATO. Let me just, if I might on the Chairman's time.

The CHAIRMAN. Please, go ahead.

Senator D'AMATO. We are not attempting to come in by way of every bill. There are lots of turkey bills.

Mr. FIECHTER. No, no. This bill has a lot of care behind it.

Senator D'AMATO. There are lots of turkey bills, and I have signed on to a few of them. I have authored some of them, sponsored some of them. And they don't go any place.

[Laughter.]

But I have a feeling that this bill, as it relates to the central theme of unjust enrichment, now, that might not be the precise legal term, but, you know, in the real world, for crying out loud, it is really giving people money-just because they happened to be in the position to exercise something-that they really shouldn't be getting.

That is what we trying to deal with here. That is what the commissioner in New York is trying to deal with. I know that is what you are concerned about. So I would say to you, as it relates to that particular area, it seems to me that that should be like this little light, you should say, "Wait, Stop," as it relates to that. It is going to pass.

I don't know what the fellows on the other side are going to do in the House. They will probably go further because we are, you know, we all conservative compared to them.

Mr. FIECHTER. I don't get the sense that they are on a different course than you are on this issue.

Senator D'AMATO. They will come in with a thing that stops it all, gives the money to Mother Theresa, you know.

[Laughter.]

That may not be a bad idea, you know. Rather than FDIC, Mother Theresa gets my vote. You don't believe me? You don't know the process.

All I am saying is that, as it relates to that salary thing, Mr. Fiechter, it seems to me you should be telling them as they come in, and your people should be alerted to it, "Hey, fellows, be sensitive, because there is going to be something like this, maybe another year, maybe in a different form." But, I don't know any Members on this committee who are going to vote against this.

Mr. FIECHTER. We would be delighted to work with the committee staff over the next 4 weeks to try to resolve this and come up with something. I don't think this is something that if we spend 3 years working on, it's a good idea.

Senator D'AMATO. I thank the Chairman, and I thank you, sir. The CHAIRMAN. Well, and I would hope, too, you guys could operate in tandem. You know, it sounds to me like, we ought not to be going off in different directions. And I like Senator D'Amato's Mother Theresa test, and it's not going to Mother Theresa now. We know that.

[Laughter.]

So let's see if we can't sort of sing off the same piece of music here. That has always been one of the problems in the regulatory process, is that, you know, it gets so arcane that we don't reach practical, sound, workable, achievable sort of common-footing understandings. I think we ought to here. The basis for that has been laid in this discussion, and I think we ought to be putting out essentially the same set of signals.

Mr. FIECHTER. We would love to have a joint rule.

The CHAIRMAN. Let's see if we can't accomplish that.

Mr. Hove. I agree. We will work very closely with the OTS toward that end.

The CHAIRMAN. And let's try to move ahead on this. I mean, you have a lot of things to do. You were here yesterday on other issues, and I know you have other things in the air. But you are both reasonable men, and this shouldn't take forever to reconcile.

Unless you have additional questions for these witnesses, let me thank you and excuse both of you and call our next panel. Mr. HOVE. Thank you.

Mr. FIECHTER. Thank you.

The CHAIRMAN. Our panel consists of Mr. Derrick Cephas, superintendent of banks, from the State of New York, who was referred to earlier by Senator D'Amato; Mr. William Drumm, who is the superintendent of the division of savings and loan associations and division of savings banks, from the State of Ohio; Mr. David Carson, who is the chairman, president, and CEO of People's Bank in Bridgeport, Connecticut, and he is here testifying on behalf of the Savings and Community Bankers of America; and then finally, Mr. Chris Lewis, who is the banking and housing policy director for the Consumer Federation of America.

We are pleased to have you all. We will make your full statements a part of the record.

I know you have prepared your statements with care, as you should and as we expect and appreciate. I think you should feel, though, that you can go to the high points of your statement and also feel free to make any additional comments on what you have already heard this morning. So feel as if you can have that degree of latitude.

Mr. Cephas, I think we will start with you, and we would like to have your statement first, and then we will proceed to the oth

ers.

OPENING STATEMENT OF DERRICK D. CEPHAS, SUPERINTENDENT OF BANKS, STATE OF NEW YORK, NEW YORK CITY, NY

Mr. CEPHAS. Good morning, Mr. Chairman. Thank you very much.

And good morning, Senator D'Amato.

I appreciate the opportunity to appear here this morning to present the views of the New York State banking department. I prepared a more lengthy statement, which is in the record, but I will summarize here our views.

The issue of conversion of savings institutions from mutual-tostock form of ownership has commanded the attention of the banking industry for several months now. We in New York have had occasion to review this issue in some depth recently, and in that connection, I would like to include in the record of this hearing a copy of the policy statement which my office issued yesterday.

Finally, before I turn to the substance of my remarks, I would also like to respectfully ask for the committee's understanding of my desire to limit my remarks today to stock conversions in general and not to comment on any particular institution or any particular transaction.

Chairman Riegle's letter confirming my participation set forth several questions which the committee sought to have addressed, and I will answer those questions individually.

The first was: Who owns a mutual institution?

Under New York law, no one owns mutual institutions. That is clearly the answer under New York law, and as far as I am aware of, it is also the law in every other jurisdiction. A New York court as recently as January 1994 affirmed this conclusion.

Neither the depositors nor the management and trustees nor the community actually owns a mutual. Because of this unique status, the responsibility, I believe, falls to bank regulators to protect the public interest in the conversion process.

What parties, if any, should receive priority rights in a conversion? I assume the term "priority rights" refers to rights to subscribe for stock to be issued in a conversion.

In New York, the law provides as follows: Depositors have a priority in the purchase of stock and all public offerings. Depositors vote to approve or disapprove of conversions in all cases except in failing bank situations.

Uncontested sales of control are allowed only in the context of undercapitalized institutions, and contested sales of control are allowed in other contexts in which depositors have a right to vote. In most cases, depositors clearly should receive a priority right to purchase stock.

In an effort to facilitate the conversion of financially weak institutions and to add greater flexibility to the conversion process, we have deviated from this standard in two cases of the sale of control. To what extent should management and insiders be allowed to participate in a conversion? Should they receive preference over depositors?

As I stated earlier, depositors in New York usually receive a priority to purchase stock in a conversion. To the extent that management and insiders are also depositors, they are entitled to purchase