Mr. FIECHTER. My position is that I think that we ought to have uniform standards applying to any institutions that convert. I wouldn't want to hold up our rules, however, Mr. Chairman, as being perfect. I think that there are certainly areas in our rules where we could make improvements. I am also-I think that the uniform standards-I am not certain whether I understood your comment-I think they need to apply both to traditional mutualto-stock conversion, as well as to merger conversions.

I think that issues arise in both transactions. I think the issues are much greater in merger conversions, but I think there also are some-the traditional mutual-to-stock related to how much the insiders are able to purchase of that stock.

Chairman NEAL. Under your rules, how much are they able to purchase?

Mr. FIECHTER. Under our rules, we set a limit that management cannot directly purchase more than 25 to 35 percent of the stock, 25 percent of the stock in the case of the larger institutions, if it is over $500 million. For smaller institutions where you might not get the same market for the stock, and by smaller we define that as below $50 million, management can buy as much as 35 percent of the stock that is converting.

Chairman NEAL. Of course, in a large deal like this-now, what size was this New York deal?

Mr. FIECHTER. It was, I think, in the range of $5 or $6 billion. Chairman NEAL. So I am told it is a $6 billion institution, so 25 percent of that is a whole lot of money.

Mr. FIECHTER. Well, it is. But there is another important feature of our regulations, which is that the depositors are given the first priority in purchasing the stock.

Chairman NEAL. Well, then

Mr. FIECHTER. So that management could only buy that 25 percent if the depositor didn't buy it.

Chairman NEAL. Well, again, I wasn't trying to hold up all of your rules and regulations as being ideal either, but on this one subject-in fact, as I understand it, North Carolina regulators adopted all of your rules and regulations except this one, and this one is the controversial one for them, and for you, though-for both of you, what is your opinion on this one subject? Is this the right approach, to limit-well, to give the depositors a first priority to buy stock and then limit what others could buy so that people in the community have a chance to buy and so on? That seems reasonable to me.

Mr. FIECHTER. Yes. I agree with you.

Chairman NEAL. Is that the right approach? What do you say, Mr. Hove?

Mr. HOVE. I agree. I think that the issue really is the issue of fairness, and what is the fair amount? And then also, an understanding by the depositors of what the value is that they have got, because so many depositors, as much disclosure as you give them, simply pay no attention to that disclosure and pass up the value that probably belongs to them and they don't take advantage of that.

Chairman NEAL. So you are saying make the disclosure statements simpler?

Mr. HOVE. Make the disclosure statement simple so that it is understandable. Also, I think it is important for the depositor to have an understanding that probably could be provided by an independent investment advisor acting on behalf of the depositors.

Chairman NEAL. Of course, now if the appraisals are correct, then you shouldn't get that initial runup in the stock price, should you? I can't understand why the appraisals are so far off.

Why is the appraised value different from the market value, when they are both values that are established within a few days or weeks of each other? That doesn't make sense to me. That tells me that the appraisal value is wrong in many cases.

Mr. FIECHTER. I think there is an-I believe, Mr. Chairman, that any time a company, it isn't just mutual thrifts, any time you have a new stock offering, even if it is a company that makes tennis shoes————————

Chairman NEAL. Yes, but they aren't appraised. Those stock offerings-I mean they are appraised in a way, but they are not appraised in this way.

Mr. FIECHTER. There is attritional runup when a company goes public with its stock. It is very difficult. It is not uncommon to have an independent appraisal come into OTS. We raise questions and the price is moved up.

In offering the stock, you never want to overprice the stock such that the process doesn't work. I think there is a natural tendency to err on the side of undervaluing.

Chairman NEAL. One other question and then I will yield to you. You said that you were trying to interpret the intent of Congress, Mr. Hove. How did you come out on that? What was your conclusion? What was the intent of Congress?

Mr. Hove. What we are trying to do is to establish a process where we can review these applications on State institutions that go to their State regulators. We would have our staff review these for the appropriateness, to see if, in fact, disclosures have been made and to see if insiders are taking an inappropriate amount.

Chairman NEAL. May I just—in the interest of time, did you find that North Carolina and Wisconsin, for example, and some other States were consistent with the intent of Congress?

Mr. HOVE. In our testimony, we have compared five States. Many of them compare very favorably with the rules that are set out by the OTS. And, as you pointed out, North Carolina, the difference is in the amount that the insiders can hold or the amount that the insiders can acquire. The rest of the regulations in North Carolina are very similar.

In fact, Wisconsin has been very different. However, it is my understanding that Wisconsin has a proposal that will bring their rules very much in line with the rules that the OTS now uses.

Chairman NEAL. But in trying to determine if they were previously consistent with the intent of Congress, what was your conclusion?

Mr. HOVE. Wisconsin has been somewhat different than the intent of Congress.

Chairman NEAL. Could you summarize the intent of Congress on this subject of executive compensation and so on?

Mr. HOVE. I am not sure I understand-has Congress spoken on the issue?

Chairman NEAL. Yes. I am asking you if Congress has spoken on this question.

Mr. HOVE. No. Not to my knowledge.

Chairman NEAL. You couldn't find it, anyway?

Mr. HOVE. No.

Chairman NEAL. OK. You had said in your testimony that you were trying to determine the intent of Congress on these subjects, and I just wondered if you had. I am not aware of the legislative history; that is why I am asking.

Mr. HOVE. No. It is not my understanding that you have. I guess what we are trying to do is to come to something that is reasonable, that is going to be reasonable for the depositor, and also reasonable for other investors.

Chairman NEAL. Thank you. Ms. Pryce.

Ms. PRYCE. I have nothing. Thank you, Mr. Chairman.
Chairman NEAL. OK. Mr. Kennedy.

Mr. KENNEDY. I think I will pass right at the moment, Steve. Thank you.

Chairman NEAL. OK. Mr. LaRocco. Mr. Orton.

Mr. ORTON. No questions.

Chairman NEAL. OK. Mr. Barrett.

Mr. BARRETT. Thank you, Mr. Chairman.

Mr. Hove, I would like to go back to the Wisconsin situation. You said that Wisconsin is somewhat different. Have you found that the conversions in Wisconsin have, with respect to the 25-percent rule, have they fallen within that guideline for insiders?

Mr. HOVE. I haven't looked carefully enough at the individual conversions in Wisconsin to speak to that, but I would be glad to get back to you and find out.

[The information referred to can be found in the appendix.]

Mr. BARRETT. When you said Wisconsin was different, what were you referring to?

Mr. HOVE. The differences between Wisconsin and the OTS and the other States are listed and laid out in my testimony.

Mr. BARRETT. Mr. Fiechter, you mentioned that you felt there was a more potential problem for merger conversions than bank conversions-than a straight mutual to savings conversion.

What do you think we should be doing to address that problem? Mr. FIECHTER. Holding hearings. Within OTS, we have actually wondered if we shouldn't, for healthy institutions-I would like to, and I think all of our commentary has pretty much excluded undercapitalized institutions where the objective is to buy them, and if capital can come in, we all benefit. But for healthy institutions, we have wondered if we shouldn't ourselves really slow down, if not declare a moratorium on merger conversions.

If an institution wishes to sell itself to another thrift or bank through a stock acquisition, there is a tremendous benefit, I think, to the depositors of that mutual to first convert to a stock organization, and then let the acquirer buy the institution in the stock market the way any other institution is acquired. The concern that I have with a merger conversion is not infrequently you may have a lot of account holders at that mutual who are offered stock in an

other bank or thrift that they know nothing about. Frequently they are offered the opportunity to buy the bank at a market price, and they are not given any of the true net worth in the institution that is converting. So I think from the standpoint of depositors, there is really a significant disincentive to having an institution go the merger conversion route.

Much of our regulation is designed to make certain that the depositor gets their fair share of the net worth of the institution that converts. That is very difficult for us to achieve in a merger conversion the way the process now works.

Mr. BARRETT. I agree with that, but I also look at the conversion from a straight mutual to a straight stock, and I think this may go to some of the comments Mr. Hove had. By and large, if I could categorize people who put their money in savings banks, I would assume that many of them are conservative in their investments, and so they are not the type of person that is going to go out and borrow $1.5 million to purchase stock if there is a conversion.

It just, for a 70-year-old woman who has had her money in a savings bank her whole life, if someone came into her and said you can get rich, honest, you can get rich, just go borrow this $1.5 million and you will be able to flip $750,000 in 1 day, first of all, she wouldn't believe you, and second, it is beyond the realm of her life to do that.

It seems to me that when you discuss this issue with ordinary people, what you are telling them is somebody is going to get rich on these conversions. The question is who? And it seems to be that it is set up for insiders and it is set up for flippers who can deposit money in different accounts throughout the country, assuming that there is going to be a conversion.

But the person who is certainly left out is the person who doesn't want to purchase stock, yet they are the person who owns the mutual savings bank. Should we be looking at an entirely different approach where the money does go to the people who actually own it, even if they are risk adverse to purchasing stock?

Mr. FIECHTER. I agree. I think the OTS rules, in a sense, go halfway, in that at least under our rules the depositors are given the first crack at the stock, ahead of the insiders. But I agree with you. I am not certain my parents, if they were given an opportunity at their age to convert, in essence, their deposits to stock in a new institution, would take advantage of it, regardless of how attractive the broker told them that stock would be.

Mr. HOVE. Could I come back to you, Mr. Barrett, because I think in the Wisconsin area it is a question of rules versus actual practice. Because we have not found cases where the practice in Wisconsin is significantly different from other areas. The rules are different, but I think the practice is not significantly different than other States.

Mr. BARRETT. That was my understanding, that the regulations were looser, but that the practice of the commission has been to stay roughly-although I have a memo here, and I will ask Mr. Lee when he is here, that says that one recent transaction allowed saving bank management employees to purchase approximately 72 percent of the stock sold by the institution. I frankly don't know

which one they are referring to there, so I will be asking Mr. Lee that. But I think my time is up, so thank you very much.

Chairman NEAL. Mrs. Maloney.

Mrs. MALONEY. Thank you, Mr. Chairman. You asked a good question earlier, why don't we just adopt the OTS rules? But in the very well-publicized Green Point Bank of the attempted takeover or merger by Republic Bank, it was reported-and I am glad that Superintendent Cephas acted forcefully to protect the interests of the depositors of Green Point, but my question is, the information reported in the press stated that the officers and directors would have received $140 million in this particular case, and I believe they said that no one would have received less than $1 million. And this was the officers and directors of the bank.

Yet this purchase, as I read, was under the guidelines of OTS, which had a 15 percent cap on how much a director could receive. How did it get so high? How did they reach $140 million amount, which Cephas ruled was excessive, under the OTS rules?

Can you in a general sense familiarize us from this example of how it got to such an exorbitant amount of money, just for having been in the right place at the right time?

Mr. FIECHTER. I can do that for the record. That was not an institution that we supervise. It is not an OTS-supervised institution. Mrs. MALONEY. But it stated in the press that they followed OTS procedures and guidelines.

Mr. FIECHTER. That sounds as though-the $140 million does not sound consistent with what we would have permitted under our regulations. But I would have to-I haven't studied their prospectus, and so I can't comment. It may be that through stock options and a number of areas of compensation that the management and officers could earn over the next few years, it may have gotten that high, but it sounds very high. Our 15 percent rule applies more to merger conversions, and the rules are that management cannot get an increase in their compensation that exceeds the greater of $10,000, or 15 percent increase in their salaries.

Chairman NEAL. Will the gentlelady yield?

Mr. FIECHTER. It just doesn't come close to that kind of limit.
Mrs. MALONEY. Yes, Mr. Chairman.

Chairman NEAL. Let me just ask a followup question on that.
Do you include all compensation, or just direct compensation?
In other words, could there be a side deal with a stock option or
something like that that vastly exceeds the 15 percent rule?

Mr. FIECHTER. The stock options where they earn it over time, they could have stock options that

Chairman NEAL. Or stock bonus, or something that would be paid out over the next 10 years, and deferred compensation and other things? In other words, your rules don't cover all of that?

Mr. FIECHTER. They do not-the 15 percent does not cover that directly, no. We do permit stock options. We have

Chairman NEAL. That may explain part of this.

Mrs. MALONEY. I think that is an excellent question, Mr. Chairman, and what I feel would be helpful is if you took the Green Point case, which the documents that I read said that they adhered to the OTS guidelines, and let us see how they were able to run the numbers up so high. I believe everyone just common sense