but rather just in having their mortgage and having their taxes paid on a regular basis.

Again, each State has addressed this issue in ways that are best for it. Connecticut's laws regarding mutuals, for example, parallel very closely their organization of nonprofit organizations. The concept of mutual deposit institutions as nonprofits was clearly embedded until the Federal Government decided that they were taxable entities in 1958. And therefore, the basis of law for the long term was based very much upon how you would handle the dissolution of a nonprofit organization in Connecticut, and no clear ownership of individual property, but with the regulator, i.e., the State, the chartering authority, having the right to review what is best in its terms as to what happens. We still believe that that is the best way to determine what, upon dissolution, are those rights.

In general, the rule of thumb has been that in changes like that, that the continuing function that was outlined in the charter is what is important, and the continuing function in mutual savings banks is clearly the providing of services to the community and the ongoing nature of that, that the requirements of that require additional capital to do that, then that is what ought to be preserved, not a very subjective right for a passing-through customer of the institution.

Finally, the idea that upon the issuance of capital, that a portion of the capital of the organization would go to some other organization, we find to be a taking of property. We find it to be particularly chilling upon anyone who is interested in raising capital or in investing in an institution that needs capital.

By what criteria and by what amount would any such amount be ceded to any other organization we feel is of such a complex nature that we think to even imply that that is a good way to proceed is a very chilling effect upon the whole organization of many kinds of nonprofit, if you will, depository institutions. That would include such things as credit unions, on the mutual funds, which today perhaps are the biggest depositories in the country, as well as upon mutual savings banks.

I appreciate the opportunity to appear before you. I believe you have a full copy of our remarks for the record.

The CHAIRMAN. Thank you.

Mr. Lewis, we would be pleased to hear from you. We will make your statement part of the record.

OPENING STATEMENT OF CHRIS LEWIS, BANKING AND HOUSING POLICY DIRECTOR, CONSUMER FEDERATION OF AMERICA, WASHINGTON, DC

Mr. LEWIS. Thank you, Mr. Chairman. The Consumer Federation appreciates the opportunity to testify today on the issue of insider abuse in the conversion of mutual institutions.

As this committee is well aware, insiders have never been all that timid about converting federally insured institutions into personal playpens. It is a recurring theme that shows up in examination reports of regulatory agencies and in the ashes of failed institutions. But we believe that this year's gold medal for chutzpah and greed perhaps ought to be awarded to the current gang of conversion artists at work on the Nation's mutual savings institutions.

CFA, as you know, Mr. Chairman and Senator D'Amato, believes that the committee performed a very valuable and lasting service over the last few years in reforming the regulation of the S&L industry, but today's hearing attests to the fact that some elements of that job are yet to be completed.

One area of abuse, the conversion of mutual institutions into stock companies, was left untouched by these recent reform efforts, and this oversight, however accidental, has turned into a wonderful fur-lined playpen for S&L insiders and Wall Street fast-buck artists. Most, if not all, of this activity is perfectly legal because Congress, State legislatures, and various regulatory agencies have failed to adequately deal with the problem, with some notable exceptions, and have left a mishmash of weak and conflicting rules on the books that have provided a welcome mat for the sharp dealmakers.

The conversion mania has produced windfalls for the management and directors at many of these institutions and has allowed stock companies to seize institutions at bargain basement prices. It has been a wonderful game for the lawyers, the securities firms, and the insiders, and in most, if not all, cases, the depositors, the owners of these mutual companies, get the crumbs. That is, whatever the insiders drop from their overloaded plates. Surely, Mr. Chairman, we believe this is no way to build a financial system. We identify four principal areas of abuse and concern regarding conversions: one, insiders obtaining control of institutions through conversions; two, unfair and excessive deals offered insiders to induce officers and directors to push for conversions without regard to the best interests of mutual depositors; three, fraudulent low appraisals of institutions involved in the transaction, thereby letting holding companies obtain mutuals at bargain basement prices; and, four, the limitation of meaningful participation of account holders in the transactions.

We believe that the committee needs to look carefully at whether these artificially induced urges are really good public policy or the right way to build a financial system.

As I note in my written statement, we believe that all responsible supervisory parties have been tardy in recognizing the seriousness of this problem and have failed to come up, at this point, with a workable policy that would insure fairness and end the windfall profit games of the insiders.

I would like to note, though, that among Federal regulators, we are very pleased with the leadership that Mr. Fiechter at the OTS has shown; and amongst State regulators, Superintendent Cephas has been unequalled in his pursuit of fair play in this area.

We do believe, though, that the public and the regulatory community need firm statutory guidelines that will control the conversions and prevent windfall profits and give the depositor owners an even break with the insiders. We believe that S. 1801, introduced by yourself and Ranking Member Senator D'Amato, provides an excellent framework for statutory protections and should be passed with dispatch.

We are pleased that the proposed legislation does not veto State conversion laws and allows State legislatures to enact additional protections for their citizens. Thus the hands of regulators like Mr.

Cephas will not be tied, and States will be able to enact laws to deal with specific situations and specific protections in their jurisdictions.

The proposed legislation properly limits the benefits of conversion provided to any officer, director, or employee to those available to the person as depositor. If the insider is not a depositor, he or she may obtain stock under the same terms and amounts that are available to the general public.

We concur, in our written statement, with the remark made by Superintendent Cephas that perhaps the length of the Treasury study should be shortened so that the Congress is in ready receipt of the recommendations that that study solicits.

We believe that the bill could stand to be improved in the area of disclosure and in proxy voting procedure. A principal area of concern for the Consumer Federation is the poor and often misleading disclosure given to mutual depositors of a proposed conversion. Depositors are often misinformed by management about the nature and consequences of a conversion and are too often provided inadequate time and resources to respond to management recommendations for a conversion.

Second, mutual insiders are often able to manipulate the voting on a conversion through the exercise of previously executed general proxies. And we believe that the bill ought to consider including a prohibition on the use of general proxies; that is, that only fresh proxies ought to be able to be used to approve a conversion. We were pleased to learn of Acting Chairman Hove's indication earlier this morning that these are two areas that the FDIC is currently looking into.

Finally, we do not underestimate the difficulties of apportioning the proceeds of a conversion among depositors, but we do believe that the committee should consider that a portion of the windfall should be plowed back into the communities that have built up the net worth of these institutions over the years.

I think, in contrast to Mr. Carson's remarks, we would recommend that the committee look at the recent example of a California institution that converted, Quaker City Mutual Savings, that set aside in the course of its conversion proceeds for a community development corporation.

Now, perhaps these funds, and Mother Theresa may not be the best recipient, but we would suggest, as we do in our written statement, that some of the excess net worth perhaps could be allocated to the affordable housing program at the Federal Home Loan Bank, which has been a public works asset of the savings and loan industry as a result of your efforts, Mr. Chairman, in the 1989 FIRREA legislation. And all mutual converting institutions are members of that system. That would seem to be a very appropriate repository for any excess net worth.

In conclusion, while the conversion issue may not be the biggest regulatory problem to come before this committee, it is clearly a prime example, an exhibit for those pushing for rational consolidation and coordination of regulatory policy and enforcement. And, Mr. Chairman, you know that we are very supportive of your ef forts in that direction.

We believe that the Congress needs to clean up this mess now while there are some mutuals left to serve local communities. The conversion game has been going on full tilt, and if remedial action is delayed, the issue will be relegated to the graveyard of good ideas that Congress let die on the vine.

The funds clearly are not going to Mother Theresa now, and for the depositor owners who are ripped off while the insiders trot off to the islands with the goods, next year will be too late.

Thank you, and I would be glad to respond to any questions.
The CHAIRMAN. Thank you very much.

Let me thank all of you.

Mr. Drumm, let me start with you, if I may. You state in your testimony that many of the news articles concerning the merger conversion of Heritage Savings Bank into Provident Bank Corp. have been erroneous. And I think now would be a good time then to correct the record as you see it.

The American Banker, which usually tries to pin these things down with some care, has estimated in their reporting on this that Provident would be paying about $1.6 million to officers and depositors of Heritage even though Heritage had an appraised value of nearly $5.7 million. Now, is that right? What is accurate here? Mr. DRUMM. This has been a difficult one to follow on a dollarfor-dollar basis. I have brought with me a breakdown, as near as we have it at this moment.

Their approval is still a tentative one. It has not reached final approval. As a matter of fact, both FDIC and our staff are on the premises as we speak, reviewing the entire process that they have gone through.

I have brought with me a copy of the deal, as we knew it when the preliminary approval was given. I will be glad to furnish that to you.

Because there is an ongoing review of those details, I would prefer not to discuss them openly at this point. I will provide you all the information that we do receive.

The CHAIRMAN. I do not want to get into all the details, and I am very much interested, and I would not want you to sidestep the issue as to whether in rough orders of magnitude there are these kinds of differences between the actual appraised value and then the value that has been established in terms of this transfer. I mean is there a gap of that magnitude here?

Mr. DRUMM. No, I don't believe so.

The CHAIRMAN. Is there any gap at all?

Mr. DRUMM. There is a gap that was filled by the Provident Holding Company who, by virtue of their agreement, purchased whatever stock had not been subscribed to or for in the offering. The CHAIRMAN. I have had some indication that the appraised value, may, in fact, be low, maybe above $5.7 million.

Mr. DRUMM. Our figures don't indicate that. If it's off, it's not very far off.

The CHAIRMAN. I take it, then, that this one is now under review? In other words, this is not on a fast track to just get the stamp of approval; that you are going back and scrubbing this down again. Is that correct?

Mr. DRUMM. Right.

The CHAIRMAN. And the FDIC is in doing it as well?

Mr. DRUMM. Exactly.

The CHAIRMAN. Have they expressed a concern to you about it? Mr. DRUMM. As recently as yesterday I had a discussion with our people.

The CHAIRMAN. Initiated by the FDIC?

Mr. DRUMM. Oh, jointly, I would say. They are both in there working on the transaction together.

The CHAIRMAN. Are you familiar with this American Banker story?

Mr. DRUMM. Yes.

The CHAIRMAN. Does it contain any major inaccuracy that needs to be cleared up here now? I mean, I am going to put it in the record, and I want to understand whether it is essentially accurate or inaccurate, and you are the person probably in the best position to say here.

Mr. DRUMM. I would prefer to provide you with the accurate numbers that came from them. I don't happen to have them well enough in mind now.

The CHAIRMAN. All right. That is fair enough. I mean, I would not necessarily expect that you would have. But because this issue has gotten this kind of a profile, you know, it is obviously one that you are familiar with and it is one that is not being treated in a run-of-the-mill fashion. And you were talking to the FDIC about it as recently as yesterday, you say?

Mr. DRUMM. Yes.

The CHAIRMAN. But I think the case facts in the American Banker story raise enough serious questions that if this story is essentially correct, we need to have more illumination from you. Now, if it is not correct and you want to challenge the story, I am asking you to do that in some detail. I mean, I do not want this to just slide on by.

Mr. DRUMM. One of the things that has come from, in great part, that experience with the Provident/Heritage deal is the new, very stringent regulations that we are about to put in effect.

The CHAIRMAN. The new ones that are about to go into effect, will they apply to this transaction?

Mr. DRUMM. Yes, to whatever extent we can, certainly.

The CHAIRMAN. But, I mean, putting in new rules, you are not going to have a situation where a certain number that have been standing in line come through under the old process as opposed to the new rules?

Mr. DRUMM. We haven't had that many transactions, in the first place. This is the only, what I call non-freestanding charter flip that we have had in Ohio.

The CHAIRMAN. Will the new rules apply to this deal?

Mr. DRUMM. I can't speak to that, but to whatever extent we can make them apply, yes, it will.

The CHAIRMAN. You haven't made a decision yet, have you?

Mr. DRUMM. Not final, no.

The CHAIRMAN. As long as you are changing the rules, wouldn't it be a good idea to not make the decision until you have the new rules in place?