dictates it was excessive, and as we look at changing regulations, which Chairman Gonzalez has had a bill in for a long time, and I commend Chairman Neal for moving forward on it, it would be helpful for us to see how that happened and how we should regulate in a way that depositors are more protected.

Mr. FIECHTER. I am told by one of the OTS employees that we have never received an application that envisioned that type of compensation, so that

Mrs. MALONEY. The point is not whether you received it or not; the point is that they have announced that they followed your guidelines, and if they did not, I would like-do you see what I am saying?

Could you look at it and let us know? Because they are saying through these loopholes when the chairman pointed out they were able to run up excessive amounts, and I think we should be aware of it. And sometimes I think thinking broadly, as an example, is a way to approach it.

Thank you.

Thank you, Mr. Chairman. My time is up. The red light is on. Chairman NEAL. Thank you. Mr. Vento.

Mr. VENTO. Thank you, Mr. Chairman.

Mr. Fiechter, the issue is a little complicated in the sense that if a conversion is going on, you also sometimes have mergers in the same instance; is that correct?

Mr. FIECHTER. Yes. There is something called a merger conversion which includes a simultaneous merger conversion from mutual stock as part of a merger by an institution.

Mr. VENTO. The point is you then have to combine and look at salaries in a different vein; is that correct?

Mr. FIECHTER. Yes.

Mr. VENTO. Can you give the subcommittee an idea of what the notice to depositors would be like in that instance. In fact, would it be determined that there has actually been a vote by the depositor, as required under OTS guidelines?

Mr. FIECHTER. Under OTS guidelines, the terms of the transaction, including any type of compensation received by the management of the thrift, have to be disclosed to the depositors, who then have to vote on whether or not they agree with the deal going forward.

Mr. VENTO. At least half of the depositors have to agree, is that correct? Is that based on an individual depositor or is it based on the amount of assets that they have in an institution?

Mr. FIECHTER. The majority of the depositors have to approve― the majority of the account holders have to agree with the conversion. Included in that, I should say, however

Mr. VENTO. And it is a description of compensation to officers and directors and so forth, as you pointed out?

Mr. FIECHTER. Well, for direct compensation for managers and directors, we do have a limit of managing directors' compensation in the merger conversion. It cannot exceed $10,000 or a 15 percent increase in their compensation, whichever is lower.

Mr. VENTO. How confident are you that given the stock options and other aspects of retirement benefits and so forth that that is really upheld? Are you pretty confident about it?

Mr. FIECHTER. I think in terms of direct compensation, I am pretty comfortable that the compensation stays within that limit. Over time, however, management can gain stock options if they stay with the newly acquired institutions, which can clearly exceed that.

Mr. VENTO. I guess it is a question of how far back you reach and how far forward you monitor, too, isn't it? I mean I don't want you to understate the potential here for changing or modifying compensation. You, as a rule, do not when you look at compensation, but you don't principally set compensation and limitations; is that correct?

Mr. FIECHTER. No, I don't think it is. We have been criticized, and a reason that thrifts have given for converting to a State before they merge was our rules on compensation were too tough, and they feel they are unfair. That if you are management of a mutual, you have been there for years, and it is because of you that it is worth so much money, they believe that our rules are too tough, and if they convert to a State institution, recently, not infrequently their compensation can be greater. And they think that they deserved that. I think it was referred to in the hearings in North Carolina that we were being paternalistic in seeing what the management got.

Mr. VENTO. My point is in looking at compensation, while the OTS looks at compensation in terms of the institution's safety, soundness, its regulatory responsibilities, and the same for the FDIC, I don't know that any of you think of yourselves as principally regulating salaries as a major role.

Mr. FIECHTER. It is major, but FIRREA and FDICIA put regulations on us.

Mr. VENTO. It is a question, Mr. Hove, of how that translates in terms of these conversions. I mean these new responsibilities, which I very much agree with, but obviously are not as finely defined as they could be. They are issues, really, that have to be brought to this particular issue in terms of this conversion from mutual-to-stock at the State level I guess through the bank, this bank organization, wouldn't you say?

Mr. HOVE. I would agree. In fact, let me speak to Representative Maloney's comment about Green Point.

First of all, the $140 million, I think, was an appraisal value after there had been substantial stock appreciation. But even if you take $140 million, that is within the 25 percent compensation guideline of the OTS. That it is an issue that is very important. The important thing to understand is that a small percentage of a large institution still is a very large number.

So that the Green Point compensation plan would in fact be within the standards of the OTS.

Mr. VENTO. Mr. Chairman, I see my light is on, too. We owe Acting Chairman Hove and Director Fiechter a debt of thanks for their work during this interim period. Congratulations to Mr. Hove on being reappointed. We look forward to continuing to work with them.

But what belies us is the supposition that S&Ls are not profitable, and here we have a situation with the market in terms of the conversions that we are talking about are saying something quite

different. It sounds like there is a big increase in terms of stock by virtue of some of the mergers and so forth.

And, as you said, 25 percent of $140 million, that represents a significant profitability. I guess the concerns that we would have is whether or not those institutions and the type of speculative activity that takes place with the stock doesn't result in a windfall, but more importantly, we are certain as to the safety and soundness of the institutions and that they are adequately capitalized. From the experience, the most recent experience that we have had, there are a lot more questions on this issue, but it is clear to me that at the very least the guidelines of the OTS need to be brought to bear at the State level as a frame of reference, if nothing else. Thank you, Mr. Chairman.

Chairman NEAL. Yes, sir. Thank you.

Mr. Kennedy.

Mr. KENNEDY. Thank you, Mr. Chairman.

I wanted to really just ask Chairman Hove a question. I understand the I think the rationale, while a lot of these banks have done very well, it seems to me that underlying, underpinning a lot of that has obviously been the fact that you provide insurance and that that gives investors a very sound kind of foundation to then get a spring-up in terms of what the new increased value of some of these stock values might be.

Now, at this point it all seems to make sense because the value of these institutions has gone up. But I also was on this subcommittee when the values of those institutions wasn't so high, and when we had to pay a hell of a lot of money to your shop in order to deal with some of the problems that the banks have faced.

So I wonder whether or not there isn't some kind of principle that we ought not to be looking at that indicates that there ought to be some value that is either paid back to the FDIC when these stock runups take place in order to deal with some of the shortfall that the taxpayers had to shore up over the course of the last few years, number one; or number two, if that isn't in place, and maybe Mr. Fiechter has some ideas on this as well, whether or not there ought not to be some kind of community fund or CRA commitment that is borne by these very large runups in prices.

I mean it seems to me from the questions that Mr. Barrett and Carolyn Maloney, as well as the chairman had asked, what you have is a situation where despite the fact that the ownership is held at the local level, what you really have is a few officers and a few directors of these institutions that are enjoying these fantastic runups, despite the fact that it really has been the U.S. taxpayer and the local community that have borne the risk, and in many cases are the basic fundamental reason why the prices have gone up. And yet when it comes to cashing in, they get very little benefit. So there is sort of this injustice that is taking place. You are the regulators, so you are trying to make sure that that doesn't exist.

Do you have some ideas on what we could do to deal with these inequities?

Mr. HOVE. You know, it is an interesting concept, and I think you are exactly right. At the time that we were having difficulties, and there wasn't a value in these institutions. It certainly was to

our benefit and the taxpayers' benefit and the community's benefit to have these conversions take place so that the stock came in, money came in, and capital came into the institutions. In fact, the institutions become healthy so that they did not become a cost. There is no question about it.

What has made all of this issue come about is the tremendous growth that we have seen in the value of these institutions. We have seen it in the industry nationwide. We have seen a real runup.

It used to be that stocks in financial institutions were selling at 60 to 80 percent of book value. We are now seeing them at 2 and 2.5 times book value. There has been a great increase.

That is what caused this intangible value that everybody is looking at. You are exactly right, that maybe some of this belongs to somebody other than depositors or insiders. It is an interesting concept that is worth looking at.

I might also mention that some of the institutions that have converted have, in fact, placed some of their money back into their community. This is precisely what you are talking about.

Mr. KENNEDY. Apparently, to try to buy off the depositor who wasn't getting anything out of the deal, right?

Mr. Hove. Well, I am not sure what their motivation was, but they did put money back into the community in a very noble and worthwhile project.

Mr. KENNEDY. All right. Sounds like they are great Americans. Mr. Fiechter.

Mr. FIECHTER. I think we ought to move pretty cautiously. I have some sympathy with what you are saying. I think one difficulty is that the institutions that cost us all so much money are not the institutions that we are talking about. These are institutions that actually ran their shops pretty cleanly, and there is an ongoing debate within the thrift industry as to how much are the thrifts that didn't get into trouble responsible for paying for the sins of those that did.

I would echo Skip's comments, and I think, Mr. Kennedy, actually, there were some noble thrifts out there. We had a thrift, Quaker City in California, that as part of their prospectus in raising capital as they converted from mutual to stock, put I think it was $6 million aside to set up a community development bank solely to return some of that net worth back to the community. And I think it is really the community that does deserve in some form or another a crack at some of this net worth.

Mr. KENNEDY. Well, I appreciate your comments. I don't think that this has to be viewed as a penalty payment. It seems to me that what we are really talking about is the fact that underneath the essential runup that has taken place has been this commitment that has been borne essentially on the shoulders of the ratepayer— excuse me, the taxpayer and the depositor. They are the people that are being left out of the benefit stream.

So all that I am trying to suggest, you don't have to go-characterize this as a penalty payment for past sins of other failed institutions, but rather the fact that there have been-there is a system that works; the system that works has created benefits, those bene

fits ought to be empowering more than just an elite core of directors and insiders in the institutions.

Now, you say, well, that is a good idea and we ought to think about it. I guess I would like to maybe hear a couple of ideas or proposals from you so that it isn't just sort of an antagonistic relationship between, you know, some people on the House Banking Committee and the regulators in terms of us trying to find out and push you into doing this.

But it seems to me that this is entirely reasonable for us to expect the regulators to establish some kind of framework where these runups take place, that target amounts ought to be set aside for-I don't know, you know, they could support President Clinton's new community development bank, they could support local CRA efforts in the local community, they could support housing or small business or economic development at the local community.

But I certainly just don't think we ought to be sort of saying, well, we will allow this to take place; yes, there is some benefit that should go to the local community and we will study it, and then Skip, you know what I am talking about, by the time we finish studying the problem, the runups will have occurred and there won't be any money left.

So if you are going to do it, you got to sort of, you got to grab it while the monkey is still in the cage, you know?

Mr. FIECHTER. I accept that. I think you are right. We had some 2,000 mutuals; we are down to 800. So if we study this another 2 years there won't be any mutuals left.

Mr. KENNEDY. Right. Can we get-I don't know, Mr. Chairman, this sort of works off of an idea that you were kind of espousing a little earlier. If there is some way that we could ask both Mr. Fiechter and Chairman Hove to give us maybe a range of two or three different concepts as to how these deals could be structured at the local level that would enable local benefits to be established? Would that be a reasonable way to proceed?

Chairman NEAL. Sure.

Mr. FIECHTER. We would be happy to do that.

Chairman NEAL. We would certainly welcome your views.
Mr. KENNEDY. Thank you very much.

Thank you, Mr. Chairman.

Chairman NEAL. Are there any other members who would like to question or comment? OK.

Gentlemen, thank you all very much for your help. I have some more questions and maybe others do that I would like to submit for the record. We will be in touch with you. Thank you again, we welcome your ideas as we move forward on this. Thank you again for your help this morning.

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

Chairman NEAL. Our next panel consists of Harold N. Lee, savings and loan commissioner, State of Wisconsin; and William Drumm, superintendent, Division of Savings and Loan Associations and Division of Savings Banks, State of Ohio.

I would like to recognize Ms. Pryce at this time who I believe would like to say a word or two about Mr. Drumm.

Ms. PRYCE. I am going to have to leave, unfortunately, and I just wanted to take the opportunity to welcome my colleague from Co