H.R. 3615; THE MUTUAL BANK CONVERSION

ACT

WEDNESDAY, JANUARY 26, 1994

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS SUPERVISION, REGULATION AND DEPOSIT INSURANCE, COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS, Washington, DC. The subcommittee met, pursuant to call, at 10:15 a.m., in room 2128, Rayburn House Office Building, Hon. Stephen L. Neal [chairman of the subcommittee] presiding.

Present: Chairman Neal, Representatives Vento, Kennedy, LaRocco, Orton, Klein, Maloney, Barrett, McCollum, Pryce, Lazio, and Huffington.

Chairman NEAL. I would like to call the subcommittee to order at this time.

The subcommittee meets this morning to continue its hearings on H.R. 3615, the Mutual Bank Conversion Act, and on the issue of mutual-to-stock conversions of savings banks generally.

Last Thursday, the subcommittee held a field hearing in Winston-Salem, North Carolina, and heard testimony from depositors, bankers, and State regulators. Much of the testimony gives rise to concerns that the insiders at mutual savings banks, unless_adequately supervised, can take advantage of their position and unfairly profit from converting an institution from mutual-to-stock form, and especially in those instances where the conversion is a merger conversion.

More than 2 months ago, we wrote to the Federal Deposit Insurance Corporation asking it to take a more active role in regulating these transactions. They have issued a policy statement which was criticized by Board member and Comptroller of the Currency, Eugene Ludwig, and our full committee chairman-and I understand that the FDIC will have some thoughts this morning on a little different approach, and I look forward to hearing those.

In an interesting development, New York State Banking Superintendent Derrick Cephas just yesterday took some strong action after he determined that the trustees of Green Point Savings Bank would receive, and I quote, "excessive personal benefits . . . that were inconsistent with New York law." As a result of Superintendent Cephas' actions, the trustees and executive officers of Green Point will receive no free stock, or even be able to purchase stock in Green Point as a part of the conversion.

Superintendent Cephas was due to be one of our witnesses this morning. Due to the need to continue to work on supervision of the

Green Point conversion, he is unable to appear, but has indicated that he will submit a written statement for the record.

We will hear from a depositor of Green Point who opposed the conversion as proposed. Management of Green Point was invited to appear as well, but declined, citing concerns over ongoing litigation. There have been mutual-to-stock conversions in other States that have raised concerns. In one transaction, Mutual Savings Bank of Milwaukee proposes to convert from a State-chartered mutual savings bank to a mutual holding company owning virtually all of the stock of the bank itself. The only stock in the savings bank to be sold will be offered solely and exclusively to 10 officers and directors. Depositors will be unable to purchase a single share of stock. Additional stock will be put into an employee stock ownership plan. The transaction would bring $2.3 million into the bank, while costing the bank $17.8 million. In short, this proposed transaction not only cuts depositors out, but reduces capital in the institution. This is a transaction that could not be done under current OTS regulation.

While there have been a number of transactions approved by State regulators in several States that appear quite outrageous, there are questions about the appropriate Federal legislation. Actually, it seemed like a pretty clear-cut issue when we were first presented it; it seems a little bit more complicated now. It may very well be that conversions from mutual-to-stock are quite reasonable and productive, and fair to everyone concerned if depositors are able to buy stock on the same terms as anyone else, or essentially the same terms.

There do seem to be some problems with these so-called merger conversions because of the different treatment and the concerns of different people. Anyway, we continue to explore the issue and try to find what is sensible, and I look forward to our witnesses' testimony this morning.

Before hearing from them, let me yield to the distinguished minority leader of the subcommittee, Mr. McCollum.

Mr. MCCOLLUM. Thank you very much, Mr. Chairman.

I could not let the opportunity pass at this first hearing since you made your announcement that you were to retire, that we very much regret that fact. I have had the pleasure of working with you in a position of chairman and ranking member on a number of occasions over the past few years, and, frankly, you are one of the best in terms of working on a bipartisan basis, in terms of getting results, that I have ever had the privilege of working with.

So I am especially disappointed to see that you have chosen to retire now, though I understand at some point we all do that. You are going to be missed though, at least by this member, and I am sure I speak for all of the members of this subcommittee and the full committee.

Chairman NEAL. Thank you.

Mr. MCCOLLUM. You are more than welcome.

Unfortunately, Mr. Chairman, I am going to have to leave to do some things that I had previously scheduled and won't be able to sit through all of the hearing, but I do look forward to reading the testimony and studying it today.

It seems that we have reignited some State law versus Federal regulations issues in this question, and I think it is going to be important that those who are here today help us clarify those issues so that we can make the right legislative judgment regarding the conversion. I am looking forward to finding out specifically how OTS manages the Board of Directors compensation and what benchmarks they use to determine what is excessive.

I would also welcome a comparison to corporate executive compensation; how much say do corporate stockholders have in the determination of executive salaries; how do proxy procedures compare, and if this is an appropriate analogy to make, given the nature of financial institutions.

I think we should remember that not too long ago Congress was preaching the salvation of the thrift industry in seeking to avoid further bailout. This is a situation where it is obvious that some thrifts, recognizing their weaknesses and strengthening their positions by merging with other institutions are changing to stock ownership. While I want to do what is right to help regulation in this area, I would not want to see us pass any legislation that would keep appropriate stock conversions from occurring, or to discourage those who really should be doing that type of activity to strengthen their position.

So all of those questions is I think what this hearing is about. I thank you for holding it, and I regret, again, that I won't be able to be here for much of it, but I am very interested and I am going to follow it closely.

Chairman NEAL. Thank you, sir, very much.

Are there others who would like to make any opening comments? Mr. KENNEDY. I just want to make a brief opening comment, echoing on one of the themes that Mr. McCollum just mentioned. Steve, I think many of the members that I have served with on this subcommittee, you have brought as important a balance to the issues that we have faced, and I really believe that Congress loses a very special person when you announced that you are going to retire. I know that we still have a year to work together, and there are going to be a lot of important issues that the subcommittee faces, but nevertheless, I just want to say how much I have appreciated the efforts that you have made to try to understand all the sides of an issue.

I think that on many-most controversial issues, when I first came to serve on this subcommittee, particularly dealing with the savings and loan crisis, you never hesitated to ask questions that oftentimes enlightened many of the younger members of the subcommittee. So I just want to thank you very much for all of the leadership and friendship that you have shown to me and tell you how sad I am that you are leaving the Congress, how much I think that the people of our country will miss you; but on the other hand, I hope that you gain some real personal happiness from your decision.

Chairman NEAL. Thank you.

Mr. KENNEDY. I just want to say how much I appreciate all of your efforts.

Chairman NEAL. Thank you, my friend.

Yes, sir.

Mr. KLEIN. Steve, I, too, would like to join in the sentiments expressed by Mr. McCollum and Joe Kennedy. I am not going to repeat all of those. I certainly join in everything that has been said about your leadership and your fairness, but I would like to express a particular thought as a freshman member of this subcommittee.

You know, when I came to Congress I had been told a lot of stories about the fact that freshmen would have very little opportunity to participate in the work of the committees and in the work of Congress. And certainly my experience has been exactly the opposite on this particular subcommittee. You have not only been a terrific friend and a terrific leader, but you have been a wonderful mentor and you have been absolutely great to me and to other freshmen members in giving us an opportunity to play a meaningful role, and I just want to express my very, very sincere and personal thanks to you.

Chairman NEAL. Thank very much.

Mr. Barrett.

Mr. BARRETT. Mr. Chairman, I know I sound like I am giving a eulogy too, but it has been a pleasure to serve under you. You have done a great job. I have a brief opening statement concerning the issues of the day, if I could.

Again, thank you for holding this hearing on this very important topic. I thank Mr. Harold Lee, from my State of Wisconsin, for being here today, as well as the other witnesses.

Mutual savings banks are rapidly converting to stock form of ownership outside the scrutiny of Federal law, so Congress is rightfully concerned about this area of transactions, as it may ultimately affect the financial services available to the American public. This issue is particularly important, because many State lawsStates lack adequate laws governing mutual bank conversions.

Unfortunately, insider abuse does exist and it is our obligation to end those abuses and to ensure that conversions treat all investors and all depositors fairly. I support the goal of the Conversion Act which seeks to apply a Federal-existing safeguard to Statechartered mutual bank conversions and to prevent any potential abuses on the part of insiders and acquirers of mutual banks.

Not only mutual bank conversion is guilty of these transgressions, so I am pleased that this legislation does not seek to eliminate these conversions. It simply makes sure that they occur in the full light of day and that they are fair to all parties involved. Thank you.

Chairman NEAL. Yes, sir.

Mr. LAROCCO. Mr. Chairman, I just want to add my voice to those of our other colleagues here in this forum and in this subcommittee to thank you for all of your contributions to this subcommittee and the Congress, and especially the friendship that you have showed me as a new Member in 1991 coming to this body. You sought out my opinion on many issues dealing with banking as a new Member and I appreciated that, and on some of the issues that I weighed in on, I found that Steve Neal had plowed away in Congresses and in years before, and you have a great reputation on this subcommittee and in the country as a whole, Steve, and I just wanted to thank you for your leadership.

Chairman NEAL. Thank you, my friend.

Let me tell you, all of you, I appreciate those kind comments. I have very mixed feelings about leaving, because I love this place and I love the people and I love my constituents and I love our system. I have no complaints. I just think it is a fabulous institution, a fabulous place. I will have been doing it 20 years, and it seems to me the time is right. But anyway, I appreciate all of your fine comments and your very fine friendship.

Yes, sir.

Mr. ORTON. Thank you, Mr. Chairman.

I also would just like to add my voice. You being one of the first people that I came to know here on the committee, I appreciate the assistance that you have given me. You have really brought intellect, leadership, and fairness to the subcommittee, and I think it is very few people who would exhibit the kind of openmindedness and fairness that you continually exhibit, this hearing not being an exception.

You always want to hear both sides of every issue, not just asking witnesses who support or endorse a particular program that you are working on, but always wanting to hear both sides, and I think you have always given everyone an opportunity to be fully heard and participate in the process, and that certainly reflects your intellect and fairness. And I appreciate you very much, and you will be missed next year.

We look forward to your leadership, however, throughout this year. There are many things that we can and must accomplish, and I know you have an agenda to do that.

Chairman NEAL. Thanks. Well, we do have a busy year. I appreciate all of your thoughts and help.

I now would like to welcome our first panel, Mr. Jonathan Fiechter, Acting Director, Office of Thrift Supervision, and the Honorable Andrew Hove, Jr., Acting Chairman, Federal Deposit Insurance Corporation.

Gentlemen, I thank you very much for coming. We will put your entire statements in the record and look forward to your summaries of your testimony.

Mr. Fiechter, do you want to proceed?

STATEMENT OF JONATHAN L. FIECHTER, ACTING DIRECTOR, OFFICE OF THRIFT SUPERVISION

Mr. FIECHTER. Good morning, Mr. Chairman and members of the subcommittee.

I appreciate the opportunity to present the Office of Thrift Supervision's views on regulating mutual-to-stock conversions and want to compliment you, Mr. Chairman, on initiating hearings on this issue. The thrift industry has changed dramatically since hearings were last held on this subject, and it is important that our policies and regulations, which were developed in the 1970's, be in accord with the current environment.

For the past 20 years, since the former Federal Home Loan Bank Board implemented its conversion regulations in 1974, mutual-tostock conversions have been a successful vehicle for bringing new capital into the thrift industry. Since 1974, over 1,000 mutual sav