riod of time, a couple of years, a bank offered $50 for the stock. So the stockholders did very well.

Frankly, I don't see anything wrong with that. That was all done out in the open; everyone had a fair opportunity to participate, as I understand it. I don't know all of the details of it. But that is my general understanding, that everyone had equal opportunity and so

on.

I mean it is just hard to see that anyone was harmed by this; everyone felt like they were advantaged. The bank paid what they wanted to pay, the stockholders got what they wanted. I mean I just don't see anyone was hurt by it. The institution was strengthened considerably at each stage in the process, so I think ultimately the taxpayers' potential liability was reduced.

There are some other deals, these so-called merger conversions where it looks like-and there again, I am not aware of all of the details-but it looks like the banks are able to pick up savings banks for almost nothing, are able to get a big chunk of new net worth for almost no cost or no risk. Is that correct?

Mr. LEE. Yes, I think it is. I don't know that it goes on all over the country, and I don't know to what extent it happened even in North Carolina. I am not privy to information on the inside_down there. But a merger acquisition is a strange transaction, and generally, the depositors are the ones that are adversely affected the most.

Chairman NEAL. Well, what are the equities here? I guess this is why we are involved in this thing.

I can't find that the Federal Deposit Insurance Corporation is in danger by any of this so far. I mean if I am missing something, I want to learn about it. It seems to me we are involved in this because of the equities involved. What do you all think? Who do you represent?

Do you feel like that you have the depositor's interests in mind, or are you primarily interested in the management of these institutions or the stockholders or the taxpayers? Who do you represent?

Mr. LEE. As a State regulator, I think I have two responsibilities: To the consumer, to the residents of Wisconsin, but also to the institution to make sure that it remains healthy. I try to weigh that in establishing priorities in a conversion transaction.

As I said, a portion of the transaction is set aside for management to make sure that that management stays there and operates the institution after the conversion with that flush of new capital and stays within its business plan and stays healthy. The majority of the stock goes to the depositors. They are the ones that have the ability then to make the quick gain and get out of the system.

Chairman NEAL. Management, you know, in one of the cases that we looked at, a management got-in fact, several of the cases we looked at, management had been there many, many years, 30 years or so, and they had no intention of staying. They were getting a big payoff, it looked to me like this may be a little unfair. I don't know. I can't read minds. Let me put this in a more-they weren't getting paid to stay there, I can say that, because a lot of them had been there 30 years or so.

They were getting big bonuses and then something else happened. They agreed to be taken over by a bank. And you know, it

is hard to read motivation, but just on the surface of it, it appeared that they might have been getting something for their willingness to recommend that their institution be sold to these banks.

Mr. LEE. That is always a possibility.

Chairman NEAL. A real cynic might look at it that way.

Mr. LEE. That is outside of the conversion process, that we really not have much to say about that until the offer comes in.

Mr. VENTO. Mr. Chairman, if I could just wind up. I think the issue with Heritage, at least according to the news stories, was that the appraised the merger conversions are very appealing. We can certainly get the institution for relatively nominal amounts. And Provident appraised Heritage at $5.7 million. They expect to spend about $1.6 million to acquire it, and that is 15 percent of the free stock and a 15-percent discount to depositors and managers. Then you start reading about the compensation package to the officers, it goes on and on. They are getting about $900,000 in issued stock and various types of other options. I think the concern is that this-if this were to become a model in Ohio, there would be a lot of concerns considering the number of mutuals eligible to convert. As was pointed out earlier, very often when an individual opens an account with a mutual and they sign over a proxy at that time. There is no process. It is a mutual in name only and there is very little participation other than by the office of the executives and we have to rely on Mr. Drumm and Mr. Lee in these Statechartered savings banks to do a good job. I think they probably try to, but they have to operate within the power and the authority that they have.

Mr. LEE. Well, I think while we do have rolling proxies, during the matter of a regular conversion, every depositor is provided with the forms to revoke that proxy and to vote on the conversion issue. The problem is that the vast majority of the members of the institution don't really care whether it converts to a stock institution or not. They are not interested in buying stock. They have their accounts there. They will continue to deal with the institution. Mr. VENTO. I understand the problem in terms of

Mr. LEE. And then you have the other end of it.

Mr. VENTO. Apathy.

Mr. LEE. Those depositors who have substantial funds on hand and have the opportunity to make a lot of money. And in Security's case, 12,000 people bought stock in the institution. Three-fourths of those got everything they asked for, because it was well over subscribed, it had to be ratcheted down, based on deposit balance. But there is an awful lot of profit to be made out there by an awful lot of people in these transactions. So there will be a group within the institution promoting the conversion, and those are a group of depositors.

Mr. VENTO. But I think, Mr. Chairman, the point is that these are not mutual participants; they are often very much motivated by substantial, inordinate benefits that may be thrown to them. I understand apathy when I see it. Someone asked me what the definition was of someone that was apathetic, and I said I don't know and I don't care.

Chairman NEAL. Mr. Barrett.

Mr. BARRETT. Thank you, Mr. Chairman. Mr. Lee, you were talking about the role that your office plays in making sure that they are capitalized. Again, my question to you is I don't see what the difference is from a public-or from an economic standpoint if the funds come from account holders or from insiders, from the capitalization standpoint.

Mr. LEE. From a capitalization standpoint, it doesn't make any difference at all.

Mr. BARRETT. OK. And your practice is to set aside stock from management's 5 percent is my understanding; is that correct?

Mr. LEE. Well, we have allowed up to a 5-percent management recognition program, but that is pretty much a giveaway, that is a freebie. We have also set aside a small part of the transaction for management to purchase it at the offering price to make sure that they have a stake in the institution. In Security's case, that amounted to a 5 percent management recognition plan and a 7 percent purchase by management so that the top management people in the organization when it was over owned 12 percent.

Mr. BARRETT. Earlier you said, I think you used the figure up to 80 percent of the stock could be purchased by

Mr. LEE. In that case there was another 7 percent MRP bringing it to 19, leaving 81 percent through regular depositors.

Mr. BARRETT. Which institution was that?

Mr. LEE. Security.

Mr. BARRETT. Security. What are the other ranges? Have there been any others that have gone higher than 80 percent?

Mr. LEE. I don't know offhand.

Mr. BARRETT. And then finally, a basic question. Again, this goes back to my first question.

Do you think we should be doing something to ensure that the true owners of these institutions, the moms and dads and grandmas and grandpas who have put their money in these institutions over the years because they are conservative people, and have helped these institutions grow and would never in a quad-zillion years want to buy stock, help them get something?

Mr. LEE. I guess I look at it as a democratic process. If they are the owners, you put it to a vote and the majority wins.

Mr. BARRETT. OK. Then my followup question there, it seems as though that proxy handling is different in Wisconsin than it is in Ohio.

Mr. LEE. Yes, it is.

Mr. BARRETT. What is the public policy reason for that. It seems that Ohio-frankly, I am more impressed by the Ohio practice, which seems to have an affirmative recognition that this is big, that this isn't just something that you should let float by. Wisconsin, frankly, seems to take the attitude well, let's just let this float by and the less people that know about it, the better.

Mr. LEE. I think we have taken the position that as long as the institution makes the effort to fully inform the depositors of all of the nuances within the transactions-and I don't agree that it is that difficult to read a prospectus, I think we insult the common depositor when we say that. But I think I don't know where I was going with that one. I need a little help on that. Where was I going?

Mr. BARRETT. I don't know.

Again, my point is that there are people out there who don't want to purchase stock, and I think the Ohio practice of bringing this issue to them and saying all right, what do you want to do now with your price.

Mr. LEE. Yes. The rest of that would have been I don't think the result would have been any different if you go to the Ohio practice. Mr. BARRETT. OK. Thank you.

Chairman NEAL. Just one other question. Who do you think owns these things? Who owns a mutual?

Mr. LEE. The depositor.

Chairman NEAL. The depositors own it in your State. Is that the same in Ohio?

Mr. DRUMM. The same? Ohio, in a mutual?
Chairman NEAL. In a mutual.

Mr. DRUMM. Yes.

Chairman NEAL. So they do have some rights?

Mr. LEE. Absolutely. We try to protect their rights and at the same time protect the rights of the institution and show some recognition for the people who brought the institution to where it is without any significant penalty to the regular deposit holders.

Chairman NEAL. We may have another couple of questions for you in writing. Could we submit those and have you help us with them?

Mr. DRUMM. Certainly.

Mr. LEE. Any time.

Chairman NEAL. Thank you all very much for being with us today.

Mr. DRUMM. Could I just make one more comment?
Chairman NEAL. Yes.

Mr. DRUMM. This is in response to Mr. Vento's statement regarding the Provident/Heritage deal that has gained so much publicity, if you will. What appeared in the press is not what actually happened in practice. What I will do is send to the subcommittee members a copy of the actual deal as it was struck.

Chairman NEAL. OK.

Mr. DRUMM. It is a far different story when you see that.
Chairman NEAL. Thank you. We would like to have that.
Thank you all very much for coming.

Mr. DRUMM. Thank you for inviting us.

Chairman NEAL. Our next panel is comprised of Mr. Chris Lewis, banking and housing policy director for the Consumer Federation of America. Mr. William Kostiw, who is a depositor at Green Point Savings Bank, Flushing, New York, is trying to get here, but I believe his flight was delayed because of the weather; and Mr. David Carson, chairman and chief executive officer, People's Bank, Bridgeport, Connecticut; and vice chairman of Savings and Community Bankers of America. His plane was hit by a deicing truck, I understand, so he is delayed, and we understand that another witness, Professor Jonathan Macey, who is the DuPratt White professor of law of Cornell Law School is also delayed. So our panel is a little smaller than we had originally planned, but we are sure we will make up for it in quality.

So we have two witnesses, Mr. Brian Smith, who is the policy director of the Savings and Community Bankers of America; and Mr. Chris Lewis of the Consumer Federation of America.

Gentlemen, I want to welcome you all this morning. We will put your entire statements in the record and ask in the interest of time that you summarize and give us a little time for questions and

answers.

Mr. Lewis, do you want to take off?

STATEMENT OF CHRIS LEWIS, BANKING AND HOUSING POLICY DIRECTOR, CONSUMER FEDERATION OF AMERICA Mr. LEWIS. Thank you, Chairman Neal. You do have my statement and I will attempt to summarize it in a few minutes.

Mr. Chairman, as you know, the Consumer Federation very much believes that the Banking Committee took the right steps in 1989 to reform the savings and loan industry and to put an end to many of the high-flying schemes of the last decade that drained deposit insurance funds, but I think today's hearing points out that part of that reform job has yet to be completed.

One area of abuse, the conversion of mutual institutions into stock companies, was left untouched by the 1989 reforms, and this oversight, however accidental, has turned into a wonderful furlined playpen for S&L insiders and stock manipulating, Wall Street fast-buck artists.

Most, if not all of this activity, is perfectly legal because legislatures and their various regulatory agencies have failed to adequately deal with the problem and have left a mishmash of weakened and conflicting rules on the books that have provided a welcome mat for the sharp dealmakers. Fair play has often gone out the window in this massive conversion lotto with the odds and all of the winnings in favor of the insiders.

The OTS, under Acting Director Fiechter, does deserve credit for leaping into the jaws of this feeding frenzy. But despite their best efforts, the OTS needs help in the form of statutory and across-theboard safeguards that will protect the depositor, the real owners, in these mutuals and the safety and soundness of the financial system and prevent further unfair and unearned windfalls from lining the pockets of the insiders.

Unfortunately, many of the States, with perhaps the noble exception of New York, and apparently OTS's sister agency, the FDIC, to date, have taken a "see no evil and hear no evil" attitude toward these ongoing abuses. Much of the concern today, as has been pointed out earlier this morning, centers around not only standalone conversions, but also merger conversions and it is this activity that is most often found in the headlines about feeding frenzies. We identify four areas of principal abuse that dot the conversion landscape. First, insiders obtaining control of institutions through conversions; second, unfair and excessive deals offered insiders to induce officers and directors to push for conversions without regard to the best interests of depositors or their communities.

Third, fraudulent low-ball appraisals of institutions involved in the transactions, which permit holding companies to obtain mutuals at bargain basement prices. And, last, the limitation of