# Washington Federal Savings & Loan Ass'n v. Federal Home Loan Bank Board

> District Court, N.D. Ohio · July 17, 1981 · 526 F. Supp. 343

URL: https://www.frixlaw.com/law-library/cases/1375704

## Case

- **Full name:** WASHINGTON FEDERAL SAVINGS AND LOAN ASSOCIATION, Plaintiff, v. FEDERAL HOME LOAN BANK BOARD, Et Al., Defendants
- **Court:** District Court, N.D. Ohio
- **Decided:** July 17, 1981
- **Citations:** 526 F. Supp. 343; 65 A.L.R. Fed. 214; 1981 U.S. Dist. LEXIS 15573
- **Precedential status:** Published
- **Opinion:** Opinion by Thomas
- **Judges:** William K. Thomas
- **Cited by:** 18 later opinions in the Frix Law Library

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## Opinion text

MEMORANDUM AND ORDER
WILLIAM K. THOMAS, Senior District Judge.
Late in the afternoon of March 18, 1980, the Federal Home Loan Bank Board (FHLBB or Board) appointed the Federal Savings & Loan Insurance Corporation (FSLIC) as receiver for Washington Feder
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al Savings and Loan Association of University Heights, University Heights, Ohio (Washington Federal). In its resolution (80-181) appointing the receiver, the Board determined that grounds existed for the appointment pursuant to section 5(d)(6)(A) of the Home Owners’ Loan Act of 1933 (“HOLA”; 12 U.S.C. 1464(d)(6)(A)), specifically:
(1) Washington Federal is in an unsafe and unsound condition to transact business in that it is unable to meet its liabilities or obligations; and
(2) the assets of Washington Federal have been substantially dissipated due to violations of law or regulations and to unsafe or unsound practices.
Later on March 18, by resolution 80-182, the Board authorized the FSLIC as receiver for Washington Federal to sell and transfer certain assets and liabilities to Broadview Savings & Loan Company (Broadview) memorialized by a purchase and assumption agreement. In the same resolution, the Board authorized the FSLIC as receiver to enter into an agreement of sale with the FSLIC in its corporate capacity, pursuant to which the FSLIC as receiver would sell to the FSLIC as corporation certain assets. The corporation would assume certain liabilities of Washington Federal which Broadview did not purchase or assume.
Resolution 80-183 adopted by the Board authorized the FSLIC as corporation to enter into an indemnity agreement with Broadview and the agreement of sale with the FSLIC as receiver.
Representatives of the Board and the FSLIC as receiver on March 18 served “papers” on Washington Federal (presumably 80-181), and employees of Broadview on March 18 took over the main office and branches of Washington Federal on the same day.
Washington Federal filed this action on March 27, 1980 and its amended complaint on April 22, 1980. It rests jurisdiction in part on 12 U.S.C. § 1464 (d)(6)(A). In its first cause of action, Washington Federal alleges that the findings of the Board on which the Board based the appointment of the FSLIC as receiver “were clearly erroneous and unsupportable and there were no other facts on March 18, 1980 justifying the FHLBB’s action.” Washington Federal asserts that:
The ex parte action of the FHLBB in declaring an involuntary receivership for Washington Federal and appointing the FSLIC as the receiver was arbitrary and unreasonable, not supported by valid findings or motivated by proper purposes, and in excess of the FHLBB’s authority under 12 U.S.C. § 1464 (d)(6)(A).
Washington Federal seeks a mandatory injunction
directing the FHLBB to remove the FSLIC as receiver and to dissolve the receivership and ordering the FHLBB, the FSLIC and Broadview to rescind all actions taken pursuant to the receivership, to reconstitute Washington Federal’s business, and to restore to Washington Federal and its depositor owners all of their assets improperly taken from them.
Defendants Bank Board and the FSLIC in their answer, filed June 6, 1980, denied all allegations not admitted to be true and requested dismissal of Count I of the amended complaint. On the same day, defendants moved to dismiss Counts II through X, inclusive, of the plaintiff’s amended complaint. This court on August 8, 1980 severed Count I from Counts II through X, ordering the separate trial of Count I.
On December 18, 1980 this court entered a memorandum and order which established the standard of judicial review and placed the burden of proof. In part, it was concluded:
The ultimate issue in the trial of this ease is whether Washington Federal has sustained the burden of proving that the Board abused its discretion in reaching its “opinion” that a receiver should be appointed. . . .
Manifestly, if Washington Federal shows by a preponderance of the evidence that the Board acted. arbitrarily and ca
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priciously, then it has established that the Board abused its discretion.
Testimony and exhibits were received at the trial, which lasted from January 5 through February 12, 1981. Following written submissions and oral argument, the case was taken under advisement on May 25, 1981.
I.
A.
Under section 706 of the Administrative Procedure Act, 5 U.S.C. § 706 , a court that reviews agency action is directed to “review the whole record or those parts of it cited by a party.”
Citizens To Preserve Overton Park v. Volpe,
401 U.S. 402 , 91 S.Ct. 814 , 28 L.Ed.2d 136 (1971), a review of informal agency action of the Secretary of Transportation, prescribes that the “whole record” shall be “compiled by the agency” and that this is the “basis for review required by § 706 of the Administrative Procedure Act.” Id., at 419, 91 S.Ct. at 825 .
The scope of judicial review determined to apply in this case coincides with the language of section 706(2)(A):
The reviewing court shall—
(2) hold unlawful and set aside agency action, findings, and conclusions found to be—
(A) arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law; ....
Nevertheless, section 706’s requirement that the administrative agency compile the administrative record, interpreted in
Overton Park,
is a general statute that does not apply here. Instead, 12 U.S.C. § 1464 (d) (6)(A), under which Washington Federal brings this action, controls. In relevant part it provides:
In the event of [the appointment of a conservator or receiver for a savings and loan association], the association may, within 30 days thereafter, bring an action in the United States district court ... for an order requiring the Board to remove such conservator or receiver, and the court shall upon the merits dismiss such action or direct the Board to remove such conservator or receiver.
As seen, the statute gives no guidance concerning the nature or composition of a judicial record that is developed in an action brought under this provision; and there has been no prior judicial interpretation of this language.
1
Provision for a district court action perforce allows for the calling of witnesses and the development of a factual judicial record.
2
What, then, is the permissible content of the administrative record developed in an association action challenging the Board’s appointment of a receiver? In its memorandum of December 18, this court required the Board to “assume the initial burden of placing on the record the factual results of any investigation or analysis of the financial condition and business practices of Washington Federal and any other findings upon which the Board based its opinion.” In effect, the Board was directed to call witnesses and produce exhibits that would reconstruct the administrative record.
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The parties agree, and it is ruled, that the administrative record should include the transcripts of the verbatim tapes of participants’ oral statements and proceedings of the Board meetings held on March 14, March 17, and March 18, 1980. Beyond that, there is dispute over the admissibility of oral statements as part of the administrative record.
During the trial, plaintiff challenged the inclusion in the administrative record of the testimony of staff members recounting any briefing session held preceding a Board meeting and attended by Board members, their assistants, and staff members. The issue arose during the testimony of Thomas Timmins, deputy director of the Board’s Office of Examination and Supervision (OES).
3
It was ruled, “Mr. Timmins may testify and others may testify in terms of what went on in the briefing session... . ” Thereupon, Mr. Timmins was permitted to testify as to his input into the briefing session on the morning of March 14, 1980, both as to what he said and also as to any documentary materials which he took to the briefing session. While Mr. Timmins and other persons attending the briefing sessions were permitted to testify as to their own statements, none was permitted to report what others said at the briefing session.
In a post-trial brief, Washington Federal specifically argues that oral recollections of Bank Board witnesses who testified as to what they said at the briefing sessions “are not a part of the administrative record and may not form the basis upon which the bank board acted.” Defendants counter by saying that the authorities reviewed
demonstrate that in informal decision-making, an agency has the right to rely on its staff in compiling information, and that the information reviewed by staff prior to the( staff’s communication of its recommendations to the decision makers constitute an appropriate part of the administrative record.
Washington Federal relies primarily upon language from
Home Box Office, Inc. v. F.C.C.,
567 F.2d 9, 54 (D.C.Cir.1977), which Washington Federal says defines the “administrative record” as the “body of material — documents, comments, transcripts, and statements in various forms declaring agency expertise or policy — with reference to which [the agency decision-maker’s] judgment was exercised.” While the court thus defined the administrative record, it is important to note that at another point in the opinion, in part IV,
“Ex Parte
Contacts,” the court makes it clear that even
“ex parte
comments” to commissioners may be an element of the administrative record. After observing that it could vacate the rules under review and “remand them to the Commission for consideration
de novo,”
the court noted as one of the defects in this approach that “it is not possible for us to expunge from the Commission’s collective memory what was said to it
ex parte.” Id.,
at 58. Deciding that “it would be useful to remove any possible effect of the
ex parte
contacts in these proceedings,” the court remanded the record to the Commission
... for supplementation with instructions “to hold with the aid of a specially appointed hearing examiner, an evidential hearing to determine the nature and
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source of all
ex parte
pleas and other approaches that were made to” the Commission or its employees after the issuance of the first notice of proposed rulemaking in these dockets. [Citations omitted.]
Id.
An evidential hearing “ ‘to determine the nature and source of all
ex parte
pleas and other approaches that were made to’ the Commission or its employees” conveys a pertinent message. Provided the
ex parte
comments of non-agency persons to members or employees of an agency are disclosed and identified, they may become part of an administrative record in an informal agency action. Broader than this court’s ruling,
Home Box Office
supports this court’s ruling. Here, only comments by staff members (no outsiders) to agency Board members are held to be part of the administrative record.
As ruled at trial, and now affirmed, staff comments to Board members at any briefing session, limited to what the staff member said, are included as part of the administrative record. The reasoning and holding of
Home Box Office
is also broad enough to approve inclusion in the administrative record of identified oral exchanges between staff members and chairman Janis.
Applying the foregoing ruling, this court holds that the administrative record includes the portions of the trial record which are designated in Appendix A.
*
The designated pages have been reproduced and are filed in the case. The court further holds that the administrative record includes the exhibits listed in Appendix B.
*
These exhibits are classified generally as (1) documents identified by one or more Board members as having been seen by him; (2) documents identified as having been sent to the Board; (8) resolutions adopted by the Board; (4) transcripts of Board meetings; and, (5) other documents relevant to actions taken by the Board.
B.
During the direct examination of Charles Glueck, chief executive officer of Washington Federal, a defense objection to a question led to a broad discussion of plaintiff’s claim that the Board staff excluded from the administrative record and the Board’s consideration information relating to a relevant factor, articulated as “the true condition of Washington Federal.” Counsel for Washington Federal asserted:
As I understand the court’s comment from the court’s ruling, there has been a restriction placed on Washington Federal as to what information Washington Federal submitted to the Board.
After the court assured counsel that this was not the case, plaintiff’s counsel continued:
I want to go beyond oral or written submissions, and that is the question I want to address.
This Court is hearing this case and judging whether the Federal Home Loan Bank Board considered the relevant factors and whether or not it abused its discretion, and that language comes right out of the
Citizens of Overton Park
case, and the first question is whether the Board considered the relevant factors.
* * * * * *
It was the obligation of the Federal Home Loan Bank Board in its regulatory process and before making a decision to make sure that it had the relevant factors before it.
Now, I think maybe that is the critical legal issue insofar as the testimony will show that just about every piece of information was fed to the Board, but I think we should make it clear that we want to be able to show to this court the true condition of Washington Federal, and then it is up to this court to conclude whether or not that condition was adequately described to the Board.
Now, that involves two things:
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First of all, whether the staff took the information which it had in its possession and gave it to the Board; and second, whether the staff made an adequate investigation in the first place to know the condition, so it could describe it to the Board; and that is the issue.
Defendants’ counsel did not immediately respond to the foregoing statements of plaintiff’s counsel. In another context, counsel for the defendant took a position that is generally responsive to the quoted comment of plaintiff’s counsel. Defense counsel stated:
.. . There
[Overton Park,
401 U.S. 402 , 91 S.Ct. 814 , 28 L.Ed.2d 136 ] the Court was faced with a statute which required the Secretary to make all possible planning to minimize harm; and there is statutory language and statutory direction and statutory prerequisites to a particular finding on the part of the Secretary of Transportation.
There was another statutory direction in
Volpe
that the Secretary could not authorize the use of funds if a “feasible and prudent” alternative exists.
So that I think, I think that the question of the standard of review in a particular agency action must look to the statutory framework and the purposes and whether or not specific statutory directions or prerequisites are established before such action can be taken.
And if we look to the statutes governing here, 12 U.S.C. [§] 1464(d)(6)(A) and by stark contrast to the EPA context, and stark contrast to the kind of finding that these statutes require with respect to the Secretary of Transportation in the context of the
Volpe
case, the statute here is extremely broad.
For an opinion to be upheld, only there be need for a ground for the appointment of a receiver, and those grounds of course are set forth in the statute just mentioned.
In final argument, defendants’ counsel added to the same argument. He said:
Your Honor, I think that we return to the relevant factors. We at no time have said — or if the Plaintiff believes we’ve said, we should like to clarify at no time did we intend to say that it isn’t for the Court to say what the relevant factors are. We say that there is only one way a statute can be examined, and that is through the Court. The Court, of course, will say what the relevant factors are, and the Bank Board submits that the guideline for the Court must be the statute. In this case, 12 U.S.C. [§] 1464(d)(6)(A) is the relevant statute, and there is no relevant consideration except one, and that is[,] was there a ground, or were there more than one ground for an appointment of a receiver for Washington Federal on March 18, 1980.
Section 1464(d)(6)(A) lists five grounds for appointment:
The grounds for the appointment of a conservator or receiver for an association shall be one or more of the following: (i) insolvency in that the assets of the association are less than its obligations to its creditors and others, including its members; (ii) substantial dissipation of assets or earnings due to any violation or violations of law, rules, or regulations, or to any unsafe or unsound practice or practices; (iii) an unsafe or unsound condition to transact business; (iv) willful violation of a cease-and-desist order which has become final; (v) concealment of books, papers, records, or assets of the association or refusal to submit books, papers, records, or affairs of the association for inspection to any examiner or to any lawful agent of the Board.
The full statutory scheme displays a clear intent to confine the basis upon which a receiver may be appointed to
“one
or more” (emphasis added) of the five listed grounds. The next sentence bestows on the Board
“exclusive power
and jurisdiction to appoint a conservator or receiver.” (Emphasis added.) The grant of exclusive power, however, is not construed to convey to the Board absolute power to decide whether a ground exists for appointing a receiver. As this court has ruled, this court must decide whether the Board abused its discretion in
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reaching its opinion that a receiver should be appointed. Under
Overton Park, supra,
this court “must consider whether the decision was based on a consideration of the relevant factors and whether there has been a clear error of judgment.”
It is essential to weld
Overton Park’s
“consideration of the relevant factors” and the “exclusive power” to appoint a receiver if one or more grounds exist, as section 1464(d)(6)(A) directs. Here are the welding rules. Factors are only relevant if they may be subsumed under “one or more” grounds that form the basis of the Bank Board’s “opinion” to order a receivership. A relevant factor may be considered only in connection with the ground or grounds under which it is subsumed.
As seen earlier, the Board determined that two grounds existed for the appointment of a receiver for Washington Federal:
(1) Washington Federal is in an unsafe and unsound condition to transact business in that it is unable to meet its liabilities or obligations; and,
(2) the assets of Washington Federal have been substantially dissipated .due to violations of law or regulations and to unsafe or unsound practices.
It is timely to settle one relevant factor now.
4
The “true condition” of Washington Federal is a factor that is relevant to and is subsumed under ground (1). Taking the next step, the relevant time period of the Association’s true financial condition must be set. It is concluded that while earlier months provide a pertinent background
5
to ascertain the Association’s true financial condition, the month of March 1980 is the time frame in which the true condition must be appraised. To show the background of the Association’s true financial condition, the court has received into the judicial record evidence of Washington Federal’s participation in the Government National Mortgage Association (GNMA or Ginnie Mae)
6
standby or forward commitment market.
The judicial record (the trial record) includes: Board exhibits and testimony of witnesses called during the Board’s initial case; exhibits of Washington Federal; and the testimonies of Charles Glueck, the chairman of the board of directors and chief executive officer of the Association, and Robert C. Sterbank, the chief financial officer of the Association. In addition to attempting to show Washington Federal’s true financial condition, the plaintiff offered testimony to challenge the credibility of statements made by Board staff members at the meetings of the Board. The Board then called witnesses to rebut plaintiff’s witnesses.
The court has received into the judicial record evidence to explain the administrative record, e.
g.,
evidence which to this court is “highly technical,”
Asarco, supra,
at 1160. More specific examples are the testi
*355
mony and exhibits related to GNMA forward commitments, conventional mortgages, GNMA certificates or securities, and trading and borrowing practices in the secondary mortgage market.
II.
A.
The FHLBB requires periodic examinations of savings and loan associations insured by the FSLIC.
See
12 C.F.R. § 563 .-17 — 1. Washington Federal was examined as of May 30, 1978; the report was filed with the Board Supervisory Agent in Cincinnati, Ohio on September 15, 1978.
7
The Report Summary first states:
The association is very active in the secondary mortgage market of GNMA mortgage securities. Its procedures, in part, include the giving of standby commitments to others for a fee and the receiving of standby commitments from others for a fee.
8
The summary concluded:
To date, the results of these activities have substantially enhanced the association’s operations and its net worth position.
In March 1971 when Board chairman Glueck
assumed the day-to-day management of the association, .. . the philosophy of the association’s operations was changed to include activities in the secondary mortgage market.
Further, the report disclosed that the Association’s secondary market transactions
9
in the years 1971 through 1974 involved the purchase and sale of FHA-VA mortgages.
As a participant in the Ginnie Mae market “approximately since 1975,” according to Mr. Glueck, Washington Federal had “outstanding commitments” of $140 million at the beginning of 1976. Chairman Glueck disclosed this figure in a letter to supervisory agent Duffus, dated June 2, 1976. Mr. Glueck also made projections of the commitments declining to $85 million in 1980. Referring to these projections, he remarked:
This program, as exhibit C shows, will allow us to peak this year in our secondary market activity and in the next four years reduce it dramatically, while allowing us to reach the reserve position required prior to our 25th year.
The “dramatic reduction” in the Association’s secondary market activity did not occur. As reported in the 1978 examination report, as of May 31, 1978 GNMA buys totaled $694.5 million while GNMA sells totaled $391.5 million. The net was $303 million.
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The 1978 report reveals that from August 1977 through July 1978 the Association received standby commitment fees (2.0 percent) less commitment fees (0.5 percent) paid to others to standby netting the Association at $8,485,340. Fee income is reported as part of “Loan Fees” in the Association’s semi-annual financial reports to the Board. For the semi-annual period ending 12/31/78, loan fees were $2,096,233; for the semi-annual period ending 6/30/79, loan fees were $1,341,556; and for the semi-annual period ending 12/31/79, loan fees were $921,270. The Association’s reported actual “Net Fee, Income Secondary Market” to have been $7,009,000 for calendar year 1978 and $2,071,000 for calendar year 1979. After June 1, 1979 when the Forward Commitment Regulation, 12 C.F.R. § 563.17-3 , was put into effect, the Association received no fee income.
10
In a section of the 1978 report, “Management’s Philosophy,” written by Board chairman Glueck, he stated:
As a general rule, we commit ourselves to standbys two years in advance and hedge and overhedge within á year of the time we can be called on to fund standbys. In addition to that positioning, we deal in the cash market.
11
Noting that the Association’s top four officers “devote in excess of 50 percent of their time to the secondary market operations” and that others are “tracking and reflecting the position of our secondary market operations on a minute-to-minute basis,”
12
he added:
Since “ours” is a philosophy of position, not one of anticipating markets, we constantly are updating our position, setting levels at which we profit buying and selling.
After stating “hedges can be acquired at almost any reasonable level as long as you are willing to pay the appropriate fee,” he concluded:
[T]he greatest fear in a forward commitment program is that interest rates will rise above the commitment level, therefore exposing the committor to excessive losses. We eliminate this possibility by (1) budgeting losses of a reasonable nature to maintain position, (2) hedging every commitment to buy, limiting to reasonable amount the differential between our forward commitment and what someone else must pay us in the hedge, and (3) budgeting and committing funds in the way of fees to overhedge our position creating the opportunity to be very active in the fluctuating cash market without
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any possibility whatsoever of a loss in the cash market.
The examiner attached schedules to the report to demonstrate the Association’s methodology in the secondary mortgage market operation. These schedules were explained by Mr. Glueck at trial; and he demonstrated actual hedging, overhedging and cash market transactions.
Forwarding the examination report to the Association on September 27, 1978, supervisory agent Duffus recommended:
The Association’s report as of August 31, 1978, shows a reduction in the volume of net commitments to buy. We recommend that you continue to cut back on the secondary market operation, but at a faster rate, in view of the possibility of the adoption of a regulation which would substantially curtail the Association’s authority to make commitments to buy. You will of course, be notified promptly if any such limit is adopted.
As predicted by agent Duffus, the FHLBB on November 28,1978 published a proposed rule “regarding forward commitments to purchase securities.” The summary of the rule stated in part that the Board proposed to regulate forward commitments by FSLIC-insured institutions, that “Regulatory action [was] needed because some institutions [were] incurring losses by engaging in forward commitments in a speculative manner” and that the new regulation “would limit the dollar amount of outstanding forward commitments.”
Washington Federal submitted to the Board a ten-page letter of comments on the proposed forward commitments rule. Noting that “[w]hile most of the proposed provisions are certainly appropriate,” the Association stated that “some of the accounting provisions are inappropriate, and would have a detrimental effect upon housing and home financing, and upon the operations of prudent and knowledgeable insured institutions.”
As a representative of the United States Savings and Loan League, Mr. Glueck met with the FHLB Board staff members in Washington in early January 1979. He repeated in greater detail the Association’s views set forth in the letter.
12 C.F.R. § 563.17-3 , effective June 1, 1979, is a revision of the proposed regulation of November 22, 1978. The general limitation in subparagraph (c)(1) states in part:
An insured institution may make forward commitments to purchase securities, subject to the limits in paragraph (c)(2) of this section, if that activity is conducted in a safe and sound manner. An example of an unsafe and unsound practice which may preclude further investment under this section is an inability to fund commitments when due.
Section 563.17-3(c)(2), “Percent of Assets,” limits an institution’s outstanding forward commitments to purchase securities to “ten percent of its assets if net worth is less than five percent of assets, or 15 percent of assets if net worth is five percent or more of assets.”
In its general comments accompanying the regulation, the Board, in effect, added a grandfather clause. It stated
that institutions which have exceeded those percentages at the time these regulations become final shall be precluded from further activity in this area until such time as they are within the limits set by subparagraph (c)(2).
As of June 1, under the regulation, the Association was limited to $29.9 million in outstanding forward commitments (fifteen percent of its 5/31/79 assets of $199 million). Its $727 million in forward commitments on June 1, therefore, exceeded the limitation by $697 million.
13
Washington Federal was “grandfathered” as to this excess. The regulation did not limit the buy
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ing of forward commitments from others to stand by the Association (“sells” or “hedges”).
On July 6, 1979 Mr. Glueck and Mr. Sterbank met at the Home Loan Bank in Cincinnati with supervisory agent Duffus and Dwight Arnall, regional director of the OES whose district at that time- included the Cincinnati bank. At the meeting, Mr. Glueck presented a plan which projected compliance with the forward commitment regulation within five years. Washington Federal asked for a waiver of the forward commitment regulation during this five-year period. At the end of the meeting, Mr. Arnall expressed his opposition to the waiver request but promised to take it up with his superiors in Washington.
A week after the July 6 meeting, Mr. Glueck received a telephone call from supervisory agent Duffus asking him to submit a written waiver request. The Association submitted its waiver request to the supervisory agent on September 7, 1979. The request read:
In order to bring our operations within the parameters of the regulation without causing undue harm, we need:
(a) Authority to exercise our judgment in exceeding regulatory limits on advances and other borrowed money.
(b) Authority to sell forward commitments and progressively reduce both the gross and net outstanding commitments according to the supporting schedules submitted herewith.
Enclosed were “six (6) sets of pro-forma balance sheets and income statements, each set based on a different set of economic assumptions, and a description of how the tools would be utilized under each ‘scenario.’ ” These projections through 1984 were said to “represent a yardstick by which our actual performance can be measured.”
Supervisory agent Duffus on September 25, 1979 recommended that the “Association’s request be approved subject to the following limitation, or conditions.” These conditions provided for close monitoring of the Association and its plan and the right to rescind approval, to modify conditions or to impose additional conditions. In a final paragraph in support of his recommendation, Mr. Duffus concluded:
To allow a maximum time frame of perhaps as much as five years in which to work out of its present situation and to bring itself into full regulatory compliance does not seem like too high a price to pay for having a much stronger association than would otherwise be the case.
Ten days after the July 6 meeting of Mr. Arnall and Mr. Glueck, Mr. Arnall wrote a memorandum to the FSLIC Deputy Director in which he requested the assignment of a different examiner to perform the “next regularly scheduled supervisory examination ... programmed for the latter part of this month.” He noted that “the Association has asked for supervisory forbearance in complying with the new regulations on forward commitments.” He asked that the examiner “rigorously analyze [enclosed] projections and the assumptions upon which they are based and advise us whether they are reasonable.” He further asked that the “examiner give us his evaluation of the additional loss exposure to the Association of issuing an additional $565 million of GNMA standby commitments as requested.”
Robert J. Klancher was assigned the examination. On August 31, 1979 he submitted an interim report; on October 29, 1979 his full report of examination was filed in the office of the supervisory agent. The five-year projections which Washington Federal attached to the September 7, 1979 waiver request letter were discussed in the interim report and the report of examination, and they were attached to the report of examination.
Noting that “the Association specifically asked that it be allowed to gradually reduce its outstanding commitments rather than being required to comply immediately,” the examiner listed two Association reasons:
One of the principal reasons is to enable the Association to sell standbys which will generate an amount of fee income that will at least offset the fee expense incurred to buy a standby.
*359
Both the interim report and the final report stated that “management considers [it] equally important ... to be able to maintain the good working relationships with brokers which have been established over the years.” As a related matter, both reports stated:
The association is finding it increasingly difficult to hedge its present commitments because the regulation has caused a reduction in the Association’s activities in this area which, in turn, has resulted in fewer broker contacts.
The two reports disclosed, as phrased in the final report:
Under the gradual reduction program the Association proposes to sell standbys to purchase $405 million GNMA securities, and to buy standbys to sell $500 million in GNMA securities over the next five years based on [an indicated schedule].
The report continued:
In order to demonstrate the need for a temporary exemption from the commitment limitation regulation, the Association has prepared a series of six operating and balance sheet projections covering a span of five years.
The interim report found that “the projections were deemed reasonable.” The final report of examination merely stated that “the basic assumptions were reviewed for reasonableness.”
Examiner-in-charge Klancher concluded his “comments” in the report of examination with this caveat:
The projection calculations, however, were based on the assumption that the Association would be permitted to proceed with its proposed secondary market activities in the not-too-distant future. Since no standbys are being sold, it appears that the final income figure will be considerably short of what was projected.
Later events were to record that the request for waiver of the forward commitment regulation during the five-year period covered by Washington Federal’s projections was not formally brought to the Board’s attention until March 14, 1980. The Klancher “comments” in the report of examination refers to the request of the Association “to exceed borrowed money limitations,” a matter also brought before the Board on March 14. He stated:
The Association is also requesting that, if circumstances dictate, it be allowed to exceed borrowed money limitations. This would give the Association, during periods of unfavorable market conditions, the latitude to avoid incurring losses by borrowing money to purchase GNMA securities for portfolio rather than funding through a sale in the open market. The Association has already begun to employ this strategy and has substantially increased its GNMA portfolio as shown on p. 11.
B.
Chief financial officer Sterbank testified that Washington Federal entered into several types of borrowing:
[T]here was some borrowing from the Federal Home Loan Bank, and we borrowed from local commercial banks, and we did reverse repurchase agreements.
I would classify them as regular reverse repurchase agreements.
14
From the beginning of November until the Association was put into receivership, it engaged in yield maintenance dollar reverse repurchase (repo) agreements rather than in “regular reverse repos”.
15
*360
A letter from the Association’s private accountants, Peat, Marwick, Mitchell & Company, dated October 26,1979, relates to yield maintenance transactions. The letter was received in evidence not for the truth of its content but as an event that preceded the Association’s use of this type of dollar reverse repo.
16
Mr. Glueck testified that he followed* “the accounting treatment of which [he] had received advice from Peat, Marwick, & Mitchell.”
Attached to a report letter to supervisory agent Duffus, dated December 20, 1979, was a summary of “November and December Dollar Repurchase Transactions” (yield maintenance variety). These resulted in borrowings of $69,194,145.17 in November and $54,433,584.20 in December, or a total of $123,627,729.37. The November 30, 1979 monthly report showed an addition of $60,-234,779 in Ginnie Maes to the Association’s portfolio. The monthly report for December 31, 1979 showed additional GNMA’s in the Association’s asset portfolio of $64,103,-005.
The letter of December 20 provided projections for the year 1980 based on cost levels using yield maintenance provisions as explained. The “estimate of the worst possible scenario for 1980 based on the present facts” projected net worth decreasing from $12,750,000 in 1979 to $8,263,000 in 1980. The letter noted that “market conditions made the last six months the worst time for Washington Federal to withdraw from its secondary market operations;” that its position had eroded; and that the “results of the erosion [would] not be very apparent until 1980.” The Association then expressed the hope “that the Federal Home Loan Bank [would] see fit to give [them] the variances [they] have requested, that, in [their] opinion are so necessary for an orderly winding down of these operations.”
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On January 18, 1980, supervisory agent Lawrence B. Muldoon wrote chairman Glueck concerning a meeting held at the Federal Home Loan Bank in Cincinnati on January 14. Present from the Association were Mr. Glueck, Mr. Sterbank and Mr. Lemley; present from the Bank were Mr. Muldoon, Mr. Duffus, and three other representatives. The letter noted that the Association had been requested to submit “current and up-dated information to support its request for waiver of the forward commitment regulation and other borrowing limitations.” Additional specific information comprising five categories and answers to specific questions were requested in the letter.
On February 12,1980 the Association forwarded to President Thiemann, Federal Home Loan Bank of Cincinnati, “all the data requested by Mr. Muldoon [in his letter of January 18].”
17
While the letter submitted a 1981 projection as had been requested, the principal data was supplied in response to the five itemized requests contained in Mr. Muldoon’s January 18 letter. In response to the first question, a “summary of commitment position — 12/31/79” showed a total position of $433,500,000 in outstanding commitments. Also a schedule giving “details of commitment position — 12/31/79” was supplied. The commitments were separately identified and described.
In answer to question 2, a schedule was attached entitled “Details of dollar reverse repurchase agreements entered into as of December 31, 1979.” The principal balance (face amount) of these repos totaled $152,-427,788.21. Each dealer was identified, and each Ginnie Mae certificate was listed with the amount borrowed (sales proceeds) and other details given with reference to each security. In essence, questions 3 and 4 of Mr. Muldoon’s letter of January 18 sought documentation of a typical transaction and “how the Association was able to borrow at the low rates shown in the December 20, 1979 letter.” In response, detailed schedules were furnished. Among other things, a “cost of money” schedule indicated that the weighted average [interest] rate of “regular reverse repos” was 13.671 while the weighted average [interest] rate of dollar reverse repos was 10.197.
Another schedule supplied, as requested, an example of accounting for GNMA dollar reverse repos. The example reflected a $1 million GNMA transaction with a particular broker. The schedule detailed each accounting step and also recited the specific accounting entries. The court allowed Mr. Glueck to testify at some length in explanation of these accounting steps.
18
It is evident that this schedule and the other schedules attached to Washington Federal’s letter of February 12 are detailed responses to the specific questions of the Muldoon letter of January 18, 1980.
In the letter of February 12, 1980 to President Thiemann of the Federal Home Loan Bank of Cincinnati, Mr. Glueck noted:
Because of the time elapsed since the submission of our plan to wind down our secondary market operation and the resulting further exposure incurred together with further deterioration of market
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conditions, that plan would no longer be effective.
He then went on to say:
Our commitments must be funded, financed and held until such time as market conditions allow us to liquidate them in an economical manner. We are enclosing all the data requested by Mr. Muldoon and cannot emphasize enough that these submissions require our presence and discussion with your staff to promptly reach conclusions that will enable us to avoid what could become a very serious problem.
This request for a meeting led to one in Cincinnati on February 28.
C.
As a result of reassignments of regional directors, on February 11 Edward O’Connell became director of the region which includes Cincinnati (Region 2). Between February 11 and February 27, the date on which he met with OES deputy director Thomas Timmins prior to his departure for the meeting with Washington Federal representatives in Cincinnati, Mr. O’Connell had read the following material about Washington Federal:
—Reports of Examination of May 30, 1978 and July 28, 1979.
—Memorandum of Dwight L. Arnall, Regional Director, January 9, 1980, to Charles G. Myers, Director, Office of Finance, asking him to comment on “the merits of the Association’s request” for “a waiver of the regulations limiting forward commitments in the amount of FHLB advances and other borrowed money.”
—Attachments to the Arnall memorandum:
Washington Federal letter of September 7,1979 requesting forward commitment and borrowing waivers and its projections of five-year plan to wind down its forward commitments. Supervisory agent Duffus’s letter of September 25, 1979 recommending the granting of the requests for waivers subject to four conditions.
Washington Federal’s letter of December 20, 1979 and projections.
Examiner Klancher’s interim report of August 31, 1979 reviewing the projections of the waiver request and deeming them “reasonable” and the computations “accurate.”
Portions of the May 30, 1978 report of examination describing Washington Federal’s secondary market operations in GNMA forward commitments.
—Charles Myers memorandum to Dwight Arnall of February 8, 1980 (finding “the Association’s request to have no merit”). —The Association’s February 12, 1980 responses to supervisory agent Muldoon’s questions of January 18, 1980.
Plaintiff argues that at the February 27 conference
without any detailed review of Washington Federal’s commitment position or how it developed, O’Connell and Timmins decided that the solution for the Washington Federal situation would be a supervisory merger.
This assertion is not supported by the evidence. As seen, the materials that Mr. O’Connell had read, for example the reports of examination, fully disclosed “Washington Federal’s commitment position [and] how it developed.” It is reasonable to assume that Mr. O’Connell relied on all the materials he had read in reaching a preliminary conclusion that there should be an FSLIC-assisted merger of Washington Federal. As for Mr. Timmins, he remembered “reviewing certain papers that Ed O’Connell brought with him to that meeting that we discussed.” When it was suggested that he “didn’t discuss with Mr. O’Connell any other possible solutions to Washington Federal on the 27th,” Mr. Timmins answered:
Oh, I don’t know that we didn’t discuss other possibilities.
I think we discussed what could have— for instance, we discussed the possibility of a receivership occurring, but as I recall, what the substance of our comments was, was that it seemed like the best solution to this developing problem would appear to be a supervisory merger.
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Mr. Glueck’s February 29 letter to President Thiemann indicated that, to their dismay, “the meeting [of February 28] opened with the conclusions expressed by Mr. Muldoon.”' It appears that Mr. Muldoon proposed an FSLIC-assisted merger. Mr. Glueck continued, “After the statement of position, we were allowed to discuss the submitted material and our analysis of potential cash and collateral needs, but it was apparent that this would be to no avail.”
The material submitted at the February 28 meeting included a face sheet entitled, “Assumptions Used in Analysis of Potential Cash/Collateral Needs.” Three “assumptions” were listed:
1. Guaranty by F.H.L.B. to dealers covering “net cash required” (combination of letters of credit and additional advances).
2. Dealers continue to roll Dollar Reverse Repos.
3. Dealers accept FHA/VA loans for collateral as projected.
Attached to the face sheet were three sheets, each entitled “Analysis of Potential Cash/Collateral Needs” for each of the years 1980, 1981, and 1982. As explained at trial by Mr. Sterbank, these attempted to review
what amount of cash could conceivably be required under different market scenarios over the period of time illustrating that there was a — certainly an upper limit on the amount that we needed, and that by April 1982 there would be no assistance required.
In the Association’s first letter of February 29,
19
Mr. Glueck wrote, “The
only
comfort derived from the meeting was
your
personal assurance that the issue is not closed and that our submissions would get further consideration.”
Apparently before he received either February 29 letter, Mr. Muldoon on February 29 wrote regional director O’Connell that consideration had been given “to all of the background data submitted by the subject Association on February 12, 1980 [the blue book], as well as at the meeting on February 28, 1980 with its management staff.” Mr. Muldoon made three recommendations: (1) that the FSLIC assume the Association’s outstanding forward commitments; (2) that the FHL Bank advance funds (secured by eligible collateral) “to permit the institution to fund additional margin calls and/or commitments due;” and (3) that thereupon “a merger of Washington Federal be accomplished on an assistance basis.”
Back in Washington on February 29, Mr. O’Connell prepared his memorandum to file.
20
Some factual statements and some opinions contained in the O’Connell February 29 memo of the February 28 meeting became part of or were the source of language in OES director Taylor’s memorandum of February 29, 1980, which he immediately circulated to each member of the Bank Board. These O’Connell statements and opinions will be assessed for factual support since the Taylor memorandum has been made a part of the administrative record. However, because this court is not hearing this case
de novo,
the court concludes that its function is limited to determining whether the O’Connell statement or opinion and the corresponding language in the Taylor memorandum is rationally based on fact found in the judicial record.
21
The memorandum states:
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The Association’s problems relate to its speculation in the Ginnie Mae market. Forward commitments to purchase are approximately $432 million through June 1981. Based on the information we received, this Association does not have the capacity to fund commitments and meet .margin calls. The Association anticipates a $17 million margin call on Monday, March 3, 1980. This, the FHL Bank of Cincinnati says it will fund through a collateralized advance. The objective being a stop-gap measure to keep the Association “alive” until a solution to its problems can be arranged.
Footnote No. 2 is related:
The Association estimates it will need $97 million in cash between now and March 19, 1980. This consists of $17 million for a March 3, 1980 margin call and $82 million in funding requirements at March 19, 1980. The Association states it will need advances of $97 million or a letter of credit plus $11 million. The Association expressed concern that the securities dealers would be unwilling to enter into further reverse repurchase agreements absent a letter of credit from the FHL Bank of Cincinnati.
The funding schedule prepared by Mr. Sterbank on March 6, 1980 and the “Cash Requirements for March 1980 Fundings” (PX 84), see Appendix C,
**
substantiate the general accuracy of Mr. Connell’s statements concerning the Association’s estimates of its cash funding needs in March 1980. Thus, the O’Connell statements reflect the upcoming financial condition in March.
Plaintiff argues:
O’Connell’s assertion of “speculation” by Washington Federal in the Ginnie Mae market was based only on his meeting with Washington Federal and not on any interviews or in-depth review of Washington Federal’s secondary market operations.
Plaintiff’s argument ignores the record. Prior to February 29, Mr. O’Connell had read the examination reports of May 30, 1978 and July 28, 1979 and their “in-depth” description of Washington Federal’s secondary market operations. The same secondary market operations descriptive material was attached to Dwight Arnall’s January 9 memorandum. He had read all the attachments. Thus he knew from the 1978 report that it was a part of Washington Federal’s “management philosophy” to “commit [itself] to standbys two years in advance and hedge and overhedge within a year of the time [it could] be called on to fund standbys.”
From the same report he knew that management recognized with their “experience in [the] secondary market operations,” that “the area of risk is confined to the period of time between when we issue a standby commitment and cover it with a hedge.” He knew that it was management’s further
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opinion that “[s]ince part of the discipline is to not let these standbys get closer than one year to call before they are hedged, the cash flow risk is non-existent.” Contrary to this opinion, James Connolly
22
opined, in effect, that it was speculative not to hedge simultaneously, but instead to hedge and overhedge a year after contracting for a standby forward commitment.
Cross-examined by plaintiff’s counsel, Mr. Connolly testified:
Q. Mr. Connolly, do you understand what Washington Federal meant when they used the word “hedge”?
A. They could have called — and, I believe, according to Mr. Glueck’s testimony, you can call it anything you want, but it was not a hedge.
Q. Mr. Connolly, we have to call it something. What do you want to call it? A. I’ll call it a separate speculative transaction.
Q. I’m not going to call it that.
A. Okay.
This further exchange occurred:
Q. Do you know any month, Mr. Connolly, in 1978 when the same result which you just described on page 25 was not true, that is, that every standby commitment was covered with a hedge?
A. I know of no month; but if I can quantify that again by saying that you can enter into any transaction and you cannot wait one year and call it a hedge.
23
Washington Federal did not offer any evidence to show that its “investment strategy” was not speculative. The closest its evidence came was Mr. Glueck’s testimony, “That was not the procedure we used,” when he was asked whether the Washington Federal Board specified that “there had to be hedges entered into on or about the time the standby commitments were contracted for.” He was more frank when, on November 25, 1977, he wrote:
We have developed our secondary market business to the extent where we do not have a problem executing the above plan and find it very
uneconomical
to hedge more than twelve to fifteen months in advance. [Emphasis added.]
Based on the administrative record as explained in the judicial record, Mr. O’Connell’s characterization of Washington Federal’s “speculation in the Ginnie Mae market” is rationally based on fact. Also there is a rational basis for the Taylor memorandum to refer to the GNMA speculation as “massive,” noting as it did that the Association had assets of $383 million and $432 million in forward commitments.
In sum, the foregoing O’Connell memorandum statements accurately and fairly picture Washington Federal’s March financial prospects, with March 19 the climax date. Combining this memorandum, the Taylor memorandum attachments, “Statement of Condition, December 31, 1979” and “Summary of Commitment Position — 12/31/79,” the following statements in the Taylor memorandum are rationally based on fact:
Washington Federal, a $383 million Association, operates five offices in the Cleveland, Ohio area. Its present problems result from a massive speculation in Ginnie Maes. The Association has commitments to purchase Ginnie Mae securities through June, 1981, of $432 million. The Association has neither the capacity to fund these commitments nor the net worth to absorb the losses estimated at $61 million which would result from the sale of such securities.
* * * * * *
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In this connection, an additional $17 million in margin comes due on March 3, which the FHL Bank of Cincinnati will fund. An additional $82 million comes due on March 19, which the Cincinnati Bank will fund if we subordinate the FSLIC as we did in Hawaii.
Mr. O’Connell’s memorandum further observed that “despite the Association’s admission that it needs assistance to honor its obligations, it is opposed to a merger.” He then stated:
The Association’s story is that it knows more about its securities transactions than anyone else and it should be given the opportunity to try to work out of its problems. This it believes can be achieved by the FHL Bank of Cincinnati providing advances as needed and also providing a letter of credit which will act to comfort securities dealers who are becoming very anxious regarding the Association. The line of credit requested is $566 million.
After reporting that the Association “was encouraged to state its workout plan and submit its requests for our review,” he stated:
The only thing offered by the Association was for us to close our eyes to the situation and let the Association do what it can to work out of its situation. The Association did state it would request a letter of credit and free access to the advance window.
Plaintiff characterizes O’Connell’s description of the Washington Federal plan as “grossly inaccurate and irresponsible.” Mr. O’Connell was asked on cross-examination if he heard the statement “a line of credit was requested in the amount $566 million.” He answered “Yes.” When asked who said it, he stated, “I believe it was Mr. Sterbank. It was not Mr. Glueck. I believe it was Mr. Sterbank.” Both Mr. Sterbank and Mr. Glueck deny that such a statement was made. The first page of the plan presented at the February 28 meeting mentioned “letters of credit” but mentioned no amount, as seen earlier. Washington Federal’s second letter of February 29, 1980 thus described its request: “As a follow-up to our discussion of February 28th, we are requesting that the Federal Home Loan Bank issue letters of credit or a guaranty in some form collateralizing the mark to market on our outstanding position with GNMA dealers.” The letter went on to say:
In addition to the letters of credit, we also require additional advances in the amount of $11 million, assuming our ability to execute dollar reverse repurchase agreements at market levels in effect at the time of our meeting.
Just as the letter spoke of letters of credit in the plural and $11 million, Mr. O’Connell’s footnote to his memorandum stated, “The Association states it will need advances of $97 million or a letter of credit [obviously different than the $566 million letter of credit], plus $11 million.”
Washington Federal’s “letter of credit or guaranty” request specified no amount on the letter of credit. However, Washington Federal’s “outstanding position with certain GNMA dealers” included its dollar reverse repos as well as its standby commitments. Clearly, Mr. Muldoon believed the letter of credit or guarantee request applied to the Association’s entire position. On March 10, 1980 he wrote Mr. Glueck:
On Monday afternoon, March 4, 1980, I advised Mr. Sterbank that a letter dated March 4, 1980 was forthcoming from the Bank indicating that the Bank would not issue a letter of credit or guaranty to Washington Federal regarding all outstanding commitments, as requested by your February 29, 1980 letter.
The total outstanding commitment position was in the $500 to $600 million range. Thus Mr. Muldoon’s letter offered circumstantial corroboration that Washington Federal requested a $566 million letter of credit, as the O’Connell memorandum stated. The court finds the memorandum statement to be rationally supported.
Slightly altered, the O’Connell statement became the Taylor memorandum sentence, “The Association requested a letter of credit of $566 million plus advances as needed.” The rationality of the O’Connell statement
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applies equally to this Taylor memorandum statement.
The “plus advances as needed” phrase is rationally based on the Association’s request for a $10 million advance in February through December 1980. However, the plan made clear that based on December 31, 1979 levels, $10 million was the maximum advance specified in the 1980 projection and no additional FHLB advance was included for 1981 and 1982. Thus, it is hyperbole, not rationally based in fact, for O’Connell to state, and for the Taylor memorandum to adopt, that the Association wanted “free access to the credit window of the FHL Bank of Cincinnati.”
24
The Taylor memorandum of February 29 reported to each Board member the outcome of the Cincinnati meeting of the previous day. In addition to the account of the meeting set forth in the Taylor memorandum, each Board member was provided with attachments, one of which was the Muldoon letter of February 29, 1980.
25
Thus the Board members knew that the supervisory agents reported that they had given consideration “to all of the background data submitted by the subject Association on February 12, 1980, as well as at the meeting on February 28, 1980 with its management staff.” By submitting to the Board members the letter that reported that “background data” had been “submitted,” it is evident that neither Mr. Timmins, Mr. Taylor, nor Mr. O’Connell was acting to screen from the Board the plans submitted by Washington Federal. Each Board member was then able, if he chose, to obtain and study those materials. The factual statements of the Taylor memorandum based on the O’Connell memorandum and the attached Association’s “statement of condition” as of December 31, 1979 are determined to be rationally based on facts contained in the judicial record. The one exception is the exaggerated statement that the Association wanted “free access to the credit window of the FHL Bank of Cincinnati.”
The Taylor memorandum proposed alternatives and made a staff recommendation. Providing a timeframe, the memorandum stated, “It would appear that March 19 is our target for either merging or putting a receiver in the Association.” Since March 19 was the date on which $52 million in dollar reverse repos and $10 million in standby commitments needed to be funded to prevent default on those obligations,
26
it was rational to suggest March 19 as a date “for either merging or putting a receiver in the Association.”
D.
Referring to the “three-hour discussion .. . with the Association’s representatives,” the Taylor memorandum stated:
While the Association’s representatives said they would cooperate, they stated that they were opposed to merger. What they want is permission to ignore regulations and accounting rules and at the same time have free access to the credit window of the FHL Bank of Cincinnati.
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A reference to “accounting rules” obviously relates to the OES memorandum, R-48, issued January 29, 1980, differentiating the accounting treatment of fixed coupon dollar reverse repos and yield maintenance dollar reverse repos. See n.14,
supra.
This memorandum is discussed in connection with the Board meeting of March 14, 1980,
infra,
at pp. 381, 382.
The statement that Washington Federal wanted “permission to ignore regulations” refers to Washington Federal’s written request of September 7, 1979. This letter sought waivers of two regulations. One is the forward commitment regulation and its fifteen percent of assets limitation. The waiver sought permission to sell forward commitments, “progressively reduc[ing] both the gross and net outstanding commitments.” The other is the borrowing regulation.
27
The Association sought authority to exceed “regulatory limits on advances and on other borrowed money.”
Plaintiff points out:
Timmins [the preparer of the Taylor memorandum] did not describe what “regulations” were at issue in Washington Federal’s request. He did not explain that Washington Federal had, in September, 1979, asked for permission to exceed the forward commitment regulation to wind down its secondary market operations.
In September 1979, regional director Arnall received the Association’s request for waivers of these regulations and supervisory agent Duffus’ recommendation that the request be granted subject to certain conditions. Duffus continued his recommendation in the report of examination filed October 29, 1979. Yet, regional director Arnall took no recorded action on the request until January 9, 1930. On that day he submitted a letter request to Charles G. Myers, director, Office of Finance, for “comments ... on the merits of the Association’s request.” The letter had the voluminous attachments identified,
supra,
at p. 362.
Another month passed. Mr. Myers on February 8, 1980 submitted his two-page memorandum to Mr. Arnall in which he found the “Association’s request to have no merit for several reasons.”
Initiated by a request from OES Director Taylor, a memorandum was submitted by Mr. Arnall to Mr. Timmins on March 10, 1980. In the memorandum, Mr. Arnall listed “various reasons why [he] did not process the Association’s request to the Bank Board immediately.” He said, “[T]here was insufficient information for me to evaluate the Association’s projections.” Although the examiners “concluded [in the interim report of August 31, 1979] that the projections were reasonable and that the computations were accurate,” he said that he “did not find the examiners’ conclusions to be too reassuring in light of their consistent disregard of the seriousness of the Association’s situation.” While he said he asked for the workpapers and backup material to be sent to Washington for his own personal review of the reasonableness of the projections, “this data was never received.”
His second reason was that “the Association’s projections quickly became obsolete” because increasing interest rates, following submission of the request, caused the market for GNMA standbys to deteriorate further. He said that while “the Association’s projections were always suspect,” they became “even more so in light of the increased rates.” As the third reason, Mr. Arnall stated:
I did not believe that there was any great urgency in submitting the Association’s request to the Bank Board. I believe that the requests were without merit. There was no provision in the regulations for an application for waiver. It was
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inconceivable to me that the bank Board would permit the Association to violate its recently adopted regulations. It seemed to me that we should not present the request to the Bank Board until we had a better understanding of the Association’s financial condition; had considered all of the possible alternatives; and decided upon the best course of action.
While it was “inconceivable” to Mr. Arnall that “the Bank Board would permit the Association to violate its recently-adopted regulations,” this was a decision for the Board to make, not Mr. Arnall. The “urgency” was manifest even though not perceived by Mr. Arnall. Mr. Arnall should have submitted the waiver request to the Board soon after the report of examination was filed on October 26, 1979. The only reasonable ground for further delay would have been to await Mr. Myers’ opinion, had it promptly been requested. None of the subreasons which make up his third reason excuse his continuing procrastination in handling the Association’s request for waivers.
28
In effect, he arrogated to himself the right to decide how the Board would rule on the Association’s waiver request. This was arbitrary.
But the matter does not end there. Plaintiff submits no evidence that expressly shows, or from which it may be inferred, that the absence of Board action on the request for waivers until the meeting of March 14, 1980 contributed to the true financial condition which Washington Federal faced in March.
29
In the absence of such evidence, Mr. Arnall’s arbitrariness becomes an immaterial factor in terms of the final result.
30
Plaintiff contends that the Myers memorandum, attached to the Taylor memorandum, is “replete with misstatements about Washington Federal’s situation.” Analysis of plaintiff’s objections convinces the court that the overall factual underpinning of his opinions does not misstate “Washington
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Federal’s situation.” Therefore, the opinion, although one with which plaintiff disagrees, is rationally based in fact. Plaintiff’s principal objection, Mr. Myers’ comments on Washington Federal’s use of “overhedging,” is discussed in the margin.
31
Plaintiff notes that Timmins attached the Myers opinion to the Taylor memorandum, but he “did
not
attach the recommendations of the supervisory agent that the waiver request should have been granted.” Plaintiff’s criticism is well taken. Since Messrs. Taylor and Timmins submitted to each Board member the Myers memorandum, fairness to the Association also called for submission of the Duffus September 25 letter recommending granting of the Association’s waiver requests subject to the named conditions. More to the point, OES director Taylor should have furnished each Board member with the Arnall memorandum of March 10 instead of putting it with “materials that [he] was collecting in a Washington Federal file.” The Arnall memorandum and its attachments contained everything. It gave Ar-nail’s reasons for not “process[ing] the Association’s request to the Bank Board immediately.” It attached the Association waiver request of September 7, 1979; supervisory agent Duffus’ letter recommending the granting of the waivers; the letter of the Association of December 20 which explained “Results of November and December Dollar Repurchase Transactions;” and the Myers memorandum of February 8, 1980.
Attaching the Myers memorandum to the Taylor memorandum while failing to attach the Duffus letter of' recommendation, the Arnall memorandum and its attachments, and the O’Connell memorandum of February 29, all exhibited an assumption, if not a decision, on the part of the staff that Washington Federal would not be able to extricate itself from its March funding needs. The question then is whether this staff attitude renders invalid the Board’s later actions on March 14 and 18. It is concluded for several reasons that it does not. First, the earlier ruling that the failure of Mr. Arnall to process the Associa
*371
tion’s waiver request has not been shown to have been material to the Association’s true financial condition in March 1980 applies equally to the failure to attach the Duff us recommendation to the Taylor memorandum. Second, since the transcripts of the March 14 and 18 meetings do not mention the Myers memorandum, the attachment of the Myers memorandum without the Duffus recommendation has not been shown to have affected the Board decisions of March 14 and 18. Third, the Myers memorandum has a rational basis in fact although Myers’ opinions cut against the Association.
III.
A.
A memorandum was jointly issued to chairman Janis on March 6, 1980 by L. David Taylor, director OES, and Samuel D. Ewing, director FSLIC. It was prepared by Gene L. Hall, “Chief of the Problem and Rehabilitation Division, Office of the Federal Savings and Loan Insurance Corporation,” and approved by Mr. Taylor’s staff (principally Mr. Timmins). This memorandum was distributed soon after March 6 to the other two Board members. Entitled “Recommendations for Policy Considerations,” the document was comprised of four parts, “Recommendation,” “Financial Data,” “Current Information,” and “Alternatives Available.”
32
Under “Current Information,” the memorandum stated in part:
Commitments of $10 million and reverse repos of $52 million come due on March 19, 1980. An additional $18 million of commitments come due throughout the remainder of March. An, as yet, undetermined amount of collateral and margin, which we believe is in excess of the Association’s net worth will be forfeited if funding is not provided. The Cincinnati Bank does not wish to make advances for this purpose unless the FSLIC subordinates its position to that of the Bank in the event of liquidation. The Association is opposed to merger and has requested the Bank to (1) make advances as needed and (2) provide a line of credit of $566 million.
Items (1) and (2) in the last quoted sentence duplicate statements in the Taylor memorandum which have been found to be rationally based. Those part II.D. rulings apply here.
Examiners Klancher and Miley worked in the office of Washington Federal during early March in preparing schedules to show Washington Federal’s current financial condition.
33
These schedules are supplemented by, and in part based upon, tabulations that were completed by Mr. Sterbank on or about March 11. One tabulation is entitled “Details of Dollar Reverse Repurchase Agreements Entered Into as of February 29, 1980.” The other tabulation is entitled “Details of Commitment Position — 2/29/80.”
From the beginning of March, Washington Federal sought a meeting first with
*372
chairman Janis and Board member Dalton and then with chairman Janis alone. Chairman Janis denied the requests. However, Rita Fair, the chairman’s executive assistant, set up and “chaired” a meeting of Board staff and Washington Federal representatives on March 13.
It is necessary to determine whether there is a rational basis for staff statements made at the March 14 Board meeting reporting the Association’s March 13 requests of the Bank Board or FSLIC. Trial testimony concerning the March 13 requests will be reviewed.
It is undisputed that at the meeting Mr. Sterbank distributed copies of and explained documents entitled “Summary of Commitment Position at 2/29/80” (Px. 58); “Pro Forma Analysis of Cash/Collateral Needs” (Px. 57); and “Cash Requirements for March 1980 Fundings (Px.
84).”
34
These exhibits are attached to Appendix C to assist in understanding references to them in this opinion.
The “Summary of Commitment Position at 2/29/80” recorded a total of $226.5 million in dollar reverse repurchases, including $109.5 million with GNMA collateral, $109 million with GNMA and FHA/VA collateral, and $8 million with no collateral. Standby commitments totaled $380.5 million. The “grand total” of dollar reverse repurchases and standby commitments was $607 million.
Referring to “Cash Requirement for March 1980 Fundings,” Mr. Sterbank explained at trial that the purpose of this schedule (Px. 84)
was to show how much money [Washington Federal] actually would need on a temporary basis until [it] got into position doing dollar reverse repurchase agreements in accord with the schedules that [it had] on Exhibits 57 and 58.
Plaintiff’s exhibit 84 starts with a total figure of $79,500,000 (the purchase price of GNMA and FHA/VA securities in the face amount of $82 million). Added to this is $20,900,000 (mark to market required at 2/29/80) for a “gross requirement” of $100,-400,000. Subtracting adjustments reduce this sum to a “subtotal — $77,700,000.” A second sum of $20,900,000 (composed of proceeds of dollar reverse repos anticipated in the latter part of March and another sum of $6.9 million in margin calls that might not be made in March) was subtracted, reducing the projected cash requirements for March to a net of $56,600,000.
It is not in dispute that the “Cash Requirements” sub-total figure of $77,700,000, rounded to $80,000,000, was reported at the March 14 Board meeting as the cash requested by the Association for March. However, the Association’s Assumptions, or Plans A, B, and C, comprising the right hand portion of “Pro Forma Analysis of Cash/Collateral Needs” (exhibit 57), and described by Mr. Sterbank at the meeting of March 13, were not physically presented or summarized at the Board meeting of March 14.
35
At trial Mr. Sterbank testified that he explained the plans to the Bank Board staff at the March 13 meeting as follows:
So all the numbers in that column are predicated on this Assumption A relating
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to the 20 million that in that circumstance the Federal Home Loan Bank would merely advance 20 million 930 thousand to cover that mark-to-market requirement as of February 29.
Plan B was for not an advancement of the fund in the form of cash, but merely in the form of a guarantee or promise to those dealers that were entitled to the coverage that the mark-to-market would be covered at some future time if Washington Federal were unable to meet the obligation out of its own funds.
Plan C, he “pointed out to the Federal Home Bank,” was “most advantageous because it ... required cash at the latest possible time” (a maximum of $23 million in January, 1981):
[I]t would have involved their issuing a guarantee to the dealers that were involved for the entire mark-to-market position as of February 29.
That amount is 84 million 526 thousand plus, and if you recall, that total came forward from Exhibit 58.
I pointed out that if the Federal Home Loan Bank were able to provide that type of guarantee, that in the month of March there would be no cash required from the Federal Home Loan Bank to assist Washington Federal in meeting its commitments.
Thus, Mr. Sterbank, in effect, is saying that the guarantee requested from the Bank Board is “84 million 526 thousand plus.”
36
There is a wide disparity between recollections of the Bank Board witnesses as to the amount of guarantee requested and Mr. Glueck’s and Mr. Sterbank’s recollections of that amount.
Mr. Taylor testified that what Mr. Glueck was asking for involved three components. The first was “a loan from either the FSLIC or the Cincinnati Bank .. . $77.7 million as a loan.” The second was “a guarantee for Washington Federal to use with its brokers, indicating that the Bank or the FSLIC would back up its commitments.” The third was “to not apply R-48 to the Association,” but he added that “at a later point in time, Mr. Glueck indicated that would not be entirely necessary.” Asked if Mr. Glueck addressed the question of the dollar amount of “how much would need to be guaranteed,” Mr. Taylor answered:
Yes. It was done in a way that it referred to the full amount in terms of the guarantee, but Mr. Glueck drew attention to the fact that what would be at risk to the Bank Board system would be the market loss on the securities, and I don’t remember an exact number. It was on the order that that risk, as he defined it, would be on the order of 100 million.
The “Summary of Commitment Position” discloses that the market loss as of 2/29/80 of the Association’s entire commitment position (dollar reverse repurchases and standby commitments) was $107 million (purchase price total of $587,920,316 less market value total of $480,220,001). Thus there is support for Mr. Taylor’s position that Mr. Glueck was speaking of a guarantee of the entire commitment position ($588 million purchase price).
At trial, Mr. Timmins testified that he drafted paragraph 4 of a document entitled “Washington Federal Outline of Alternatives.” Prepared after the March 13 meeting, it was distributed to the Board members at the March 14 meeting. Under the heading “Loan for WF and guarantee of commitments (Association’s proposal),” the first sentence of paragraph (section) 4 reads:
Loan of $80 million in March and guarantee by FSLIC to brokers to fund all commitments ($510 million).
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It is evident that the total of the two sums ($80 million loan and $510 guarantee) is the equivalent of the guarantees testified to by Mr. Taylor. To the same effect, Mr. Hall testified:
Mr. Glueck stated, if my recollection is correct, at the meeting on the 13th, that in order to meet his obligations, he needed 77.7 million dollars in cash during March, and he needed, to make that work successful, a 510 million dollar guarantee from the insurance corporation, and that was a contingent liability against the insurance corporation’s fund. In addition, as I said earlier this morning, I believe he also required relief from the R-48 and the borrowed money regulation.
The final Board witness who was queried about the size of the guarantee requested by Mr. Glueck was Mr. Richard Perry, assistant to Board member Dalton. He recalled the following:
He [Mr. Glueck] indicated . . . that without guarantees from the FSLIC or the Bank Board in the approximate amount of $607 million, that they would indeed default on the commitments coming due.
In addition to the $607 million approximate guarantee of their outstanding commitments, it was also requested that the Bank Board, through the bank system or otherwise, provide the cash as required to fund other commitments which come due in March, that would have amounted, according to Mr. Glueck, to $77,700,000.
On direct examination, Mr. Glueck was asked:
At Mr. Taylor’s or Mr. Perry’s interrogation here in court, do you recall him saying that, “We needed $607 million of guarantees and $77 million in cash?”
Mr. Glueck answered, “Yes, I do.” He was then asked, “Is that true?” and he answered, “That is false.” As seen, when asked, “The maximum amount of guarantees if those plans had been taken that involved guarantees would be what number?”, Mr. Glueck answered, “$84,526,000.”
Plainly there is a conflict between the testimony of the Bank Board witnesses and Messrs. Glueck and Sterbank on the subject of the size of the requested guarantee. The four Bank Board witnesses testified that the Association sought an FSLIC guarantee, a “contingent guarantee” as Mr. Hall put it, covering the Association’s entire commitment, $588 million (purchase price) or $607 million (face amount),
i.
e., $510 million net in addition to the March loan of $77.7 million. Mr. Glueck insisted that the guarantee requested was the $84,526,000 specified in Px. 58, and Mr. Sterbank said the same thing.
On the face of the Association’s three plans, the highest dollar amount of any specified guarantee was the $84,526,524 mark to market guarantee. There would remain uncollateralized the balance of the Association’s entire commitment position ($510,000,000 after the March advance of $78,000,000). Yet the need continued to assure the dealers on the street that the outstanding dollar reverse repos and the outstanding standby commitments held by them (purchase price of $588,000,000 as of February 29, 1980) would be funded when any of the commitments came due. Because of this continuing reality, despite the maximum guarantee figure in the plans, an Association request for a commitment guarantee of $510,000,000 (gross of $588,000,000 as testified to by Messrs. Timmins and Hall) is determined to be rationally based in fact. The $607 million guarantee figure of Perry, like Taylor’s testimony, speaks more broadly to a guarantee of the entire commitment position.
B.
The Board met on March 14, 1980 to consider the proposal that Washington Federal presented to the Bank Board staff on March 13. Earlier that day there had been a briefing session between the Board and staff concerning the same subject. While the principal components of the meeting of March 14 -will be later examined in greater detail, those components will now be identified, the precise proposal voted on by the Board will be defined, and the relationship of that Board action to the meeting of
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March 18 in which receivership was ordered will be introduced preliminarily.
OES director Taylor and deputy director Timmins described the financial condition of Washington Federal and its proposal to meet that condition. Larry M. Berkow and Lawrence Hayes, each associate general counsel of the Federal Home Loan Bank Board, discussed waiver requests of the Association. The forward commitment position of the Association at different dates was reviewed. Bank Board members and staff members engaged in a discussion of the Association proposal and FSLIC exposure if the proposal were approved.
The staff set forth alternatives available if the proposal were not accepted and discussed the immediacy of the situation faced by the Association. Chairman Janis asked for recommendations from the staff and for their reasons; Board members then gave their comments.
As finally voted upon, the Association’s proposal was defined by the chairman in these words:
In other words, the so-called loan of $78 million; the guarantee of $588 million [corrected to “a guarantee then of approximately $510 million]; and the forbearance of accounting techniques on reverse repos.
Each board member voted “denied.”
The Board action under review pursuant to section 1464(d)(6)(A) is the Bank Board’s March 18 order of receivership entered by resolution at the meeting of that date. Viewed separately, the Board’s denial of the Association’s proposal is deemed not reviewable either under section 1464(d)(6)(A) or under the administrative procedure act ( 5 U.S.C. § 704 ). However, the denial on March 14 of the Association’s proposal and the proceedings leading to that denial need to be examined for the presence or absence of factors relevant to the grounds upon which the Board’s receivership order of March 18 was based.
(1.)
The “special” Bank Board meeting of March 14,1980 commenced with Board general counsel Miskovsky stating:
There’s being presented to the Board now a proposal which has been made by an association. I think the Board may want to come to some decision on this proposal, therefore I think the record ought to be complete and I think a great deal of matters which, Mr. Taylor, I think would be the one to present this to start out, and I think the Board must be sure that the record is fairly complete on which then they can come to a decision.
Mr. Taylor then stated:
This is a case involving Washington Federal of University Heights, Ohio... The association is in a problem situation that actually has been confronting them for some time, but there is also an immediate situation that we need to turn to as well.
The long-term situation that we’re discussing here this afternoon is that this association has outstanding commitments of $600 million in forward purchases of Ginny Mae securities. This was a position that actually was set some time ago; commitments as of last June or so were something on the order of $700 million and there have been no new commitments since that point in time.
The short-term problem, the immediate problem that’s pressing on this association at this point, is that there are margin calls that are due in March; there are commitment dates to meet; there are reverse repos to fund.
Mr. Taylor then indicated that in the March 13 meeting, the Association “indicated that the only source of meeting these immediate needs [was] the Bank Board System.” He then described three related aspects of the Association’s proposal,
the first of which was to meet the March requirement, their estimate of that requirement is $78 million. Furthermore, that the Bank Board System guarantee that the Association — would guarantee to back the Association in meeting the $600 million in forward commitments from this point, and that under this flag that they be permitted to wind down their positions by rolling out the commitments
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using reverse repos; this would require forebearance [sic] from accounting techniques which would force them to account for reverse repos in these transactions as sales and purchases and thereby taking losses.
Shortly thereafter, Mr. Miskovsky injected a question; after responses he stated:
And now I think [the proposal] has to be adequately aired to the Board so that the Board completely understands the association’s offer in effect.
Thereupon Mr. Taylor and Mr. Timmins responded:
Mr. Taylor: Ok. I think the first part of their offer in terms of the $78 million; in terms of a commitment to carry the funding for this month — for the remainder of March is clear, perhaps we need to turn to the guarantee and the impact of that guarantee. Tom, can you lead us through your perspective on that?
Mr. Timmins: What the association has requested is a guarantee in effect by the Insurance Corporation that fundings totaling $588 million will be met, and by the FSLIC doing so, the brokers would release to the association some $60 million of collateral which is now held as margin on outstanding commitments, both firm and standby, and that it would also relieve the association henceforth in the funding of the $588 million from posting any additional collateral. This would be unnecessary since the Federal Government in effect would be sort of — FSLIC in effect would be standing behind these fundings. They request approximately $80 million in cash as a loan for the March funding because they do not believe that they can get the collateral released in time to guarantee the March funding. So what they’re asking for is $80 million in cash in a loan, and a guarantee which will free up an additional $60 million in collateral which they can then use as collateral for reverse repos to hon- or all of the outstanding firm and standby commitments.
Plaintiff says that Board members “were
not
told about Washington Federal’s three proposals” and that throughout the meeting of March 14 “the Staff referred to Washington Federal’s proposals as if they were one plan.” Plaintiff refers to “Pro Forma Analysis of Cash/Collateral Needs” (Px. 57) , which contains Assumptions A, B, and C, the three so-called workout plans. About ten copies of exhibit 57, “Summary of Commitment Position at 2/29/80” (Px. 58) , and “Cash Requirement for March 1980 Funding” (Px. 84) were distributed by Washington Federal at the March 13 meeting. The evidence indicates that the “Cash Requirement” schedule, but not the “Pro Forma” schedule, was received by Board members.
Mr. Timmins helped prepare, and Mr. Taylor circulated to each Board member, the Washington Federal “Outline of Alternatives,” the fourth paragraph of which dealt with the “Loan for WF and Guarantee of Commitments (Association’s Proposal).” General counsel Miskovsky exhibited a concern with thoroughness when he stated at the Board meeting, “I think [its proposal] has to be adequately aired to the Board so that the Board completely understands the association’s offer in effect.” The same concern should have led Mr. Taylor and Mr. Timmins to attach to the “Outlines of Alternatives” (distributed to the Board members) copies of the three documents which Washington Federal presented to the staff at the March 13 meeting.
Whether the Board would have approved any one of the three plans (Assumptions A, B, and C), assuming they had had the physical plans before them, probably would have depended upon the willingness of the Board to accept and approve the plans’ express assumptions. The first assumption was that Washington Federal could extend “all commitments ... in the form of Dollar Reverse Repos.” In view of its rejection of the Association’s request for forbearance from R-48,
see
pp. 380, 381,
infra,
it is predictable that the Board would not have approved the Association’s use of yield maintenance dollar reverse repos. Furthermore, board chairman Janis appeared to accept economist Marcis’ prediction that “at least
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over the near term future the risk is still one that rates will continue rising” and therefore the market price of GNMA’s would reciprocally fall. Thus, it is highly unlikely that the Board would have accepted the second assumption of the projection of the three plans that “market prices remain fixed at 2/29/80 levels.” Board member Dalton’s first reason for not accepting the proposal was that it “depend[ed] on too many variables in the market place.”
It seems likely that Board member assistants who attended the March 13 meeting thereafter briefed the Board members about the Association plans. Nevertheless, if Board members were unaware of the three plans, then they were also unaware that the plans called for advances to the Association in addition to the $78 million reported by Messrs. Taylor and Timmins on March 14. The advances peaked at $44.7 million in assumption A, $23.8 million in assumption B, and $23.1 million in assumption C. In turning down a requested advance of $78 million to meet the March funding needs of the Association, the Bank Board thus turned down a request that was smaller than the Association’s actual total request for advances.
Associate general counsel Berkow informed the Board members:
Now the association has suggested that there was [sic] several applications on file before the Board [in] which they had previously requested waivers of certain of our regulations, particularly regulations that would permit them to have invested additional funds in Ginny Mae certificates, and these — I think the last letter came in sometime in September of 1979 and this has not been ruled on by the staff nor replied to. In addition they have felt that if they had been permitted a waiver of the regulation, they would have improved their condition.
Mr. Berkow then stated:
The staff has reviewed this and felt that in the light of the rising market, that their proposal would not have had that intended effect, and that the waiver of the regulation should not have been permitted.
Mr. Berkow’s mention of the staff review was obviously a reference to regional director Arnall and his identical conclusion in his March 10 report.
See
n.30,
supra.
Mr. Berkow made no mention of supervisory agent Duffus’ September 25, 1979 recommendation to regional director Arnall that the waiver be granted on stated conditions. However, as this court has determined, the failure to bring the Association’s request for waiver (including agent Duffus’ recommendation) to the Board at a date earlier than March 14 has not been shown to have contributed to the Association’s condition as it existed on March 14. Mr. Berkow next told the Board members:
The association’s officers at a meeting yesterday also suggested that they had a lot of experience in handling Ginny Mae securities, and that they were competent, and that they were willing and desirous of working out this problem themselves, and that they wanted the Board to consider that in terms of this particular proposal.
Thus, the Association’s September 7, 1979 request for waiver of the forward commitment regulation was taken up at the March 14 Board meeting. At this meeting, the Board did not expressly pass on this waiver request or on the Association’s request for a waiver of the outside borrowing regulation, the continuing violation of which was brought to the attention of the Board members by Mr. Hayes. However, the Board’s rejection of the Association’s proposal as put to the Board by chairman Janis impliedly rejected both waiver requests of the Association.
Later in the meeting, the staff responded to inquiries of Board member DiPrete as to the Association’s commitment positions by “dig[ging]” out of its records these totals:
Mr. Timmins: At the end of May, 1978, the Association had a net position of $303 million long; the result of $695 million longs and $392 million in shorts. On July 31, ’79 they were long; net long $533 million as a result of a $661 million long and $128 million short. And as of Febru
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ary 29, 1980, they were long $588 million without any shorts against them. They are net $588 million long.
Developing the question of exposure under the Association’s proposal,' Mr. Janis put this question, “So we could be obligated to meet $588 million worth of commitments?” Mr. Timmins answered:
Right. Let me give you one further figure. If the market stays the same as it is as of the end of February 29, 1980, funding these commitments, you would get delivered to you securities worth $107.7 million less. In other words the securities that would be delivered would only be worth, for the $588 million you would put out, you would get securities worth $480 million. You would stand a market loss of $107.7 million.
37
Plaintiff charges Mr. Timmins with a misstatement adding, “At least chairman Janis thought that, under Washington Federal’s proposal, a loss to the FHLBB of $107 million would be sustained.” That Mr. Janis understood this was a market loss is revealed by his response to Mr. Timmins. “So in other words, if the market stays the same, we would wind up with a $107 million loss.” Later, he said, “Under the proposal ... we are currently reviewing, if the market stays the same, the loss would be $107 million.” At no time did Mr. Timmins call it an out-of-pocket loss. He made it clear that the “[FHLBB] would stand a market loss of $107.7 million.” Hence, there is no misstatement.
Chairman Janis combined the market loss of $107.7 million with the $80 million needed for March funding in discussing the cost of the Association proposal. He asked for alternatives. Mr. Ewing, director of FSLIC, outlined them: (1) a liquidation and payment of insurance; (2) appointment of a receiver and the simultaneous transfer of assets and liabilities to another association; (3) voluntary merger. Mr. Ewing estimated the cost of alternative (1) as $133 million and that of either (2) or (3) roughly projected as $115 million. These figures were elaborated in the “Outline of Alternatives” given to each Board member before the meeting.
In oral argument, plaintiff’s counsel insisted that
the staff allowed the Board to act on Washington Federal with no idea of its true condition, with no idea how it got to where it was, what had happened to this fine institution, or how Washington Federal intended to deal with its problems because it was still an independent viable organization functioning under its board of directors, and it intended to and developed plans, multi-plans, as the Federal Home Loan Bank Board kept dallying with it, plans to deal with whatever the crisis was.
Unquestionably,' the Board would have been better informed on March 14 if as background material, each member had been supplied with the 1978 and 1979 reports of examination. In the alternative, they would have benefited from reading the several attachments to Arnall’s memorandum to Myers dated January 9, 1980, itemized,
supra,
at p. 362. Also they would have gained additional insight into Washington Federal if the Arnall memoranda of March 10, previously reviewed, and March 7 (relating to the supervisory history of the Association) had been furnished to each Board member. But since the true condition of the Association in March 1980 is the relevant factor to be considered under the first ground upon which the Board based the receivership, the question is whether the Board was sufficiently informed as to this true condition in the meetings of March 14 and March 18, 1980.
The true current financial condition of the Association unfolded when Mr. DiPrete asked:
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One thing we haven’t talked about and might conceivably be relevant is the timetable under which either a response has to be given or should be given to the association or an election made as to one of the alternatives. Is that a factor?
This prompted a question from Mr. Janis and a response from Mr. Timmins:
Mr. Janis: What is the immediacy of this situation?
Mr. Timmins: The immediacy is that Monday there is a margin call from First Penco for our securities with a market value of $2.9 million. There is question as to whether or not the association could meet that. There is then another margin call on the 19th, a major margin call of $6 million as to which, if the broker is willing to repo it, there may only be a call of 240; if he doesn’t, there is a $6 million call. On the 20th there is an additional $6 million and it goes up throughout the rest of the month.
38
He then spoke of the Association’s ability to meet these fundings:
The association’s where-with-all to meet these is in more than considerable doubt; as a matter of fact at a meeting in this building yesterday with the chairman of the board of the association, he admitted to us that he was without resources probably to meet any of these calls. So that the immediacy is here and is beginning Monday afternoon, in all likelihood that the association will be unable to meet a margin call.
Thereupon Mr. Janis asked the question, “Does this amount to their operating in a unsafe and unsound manner?” And Mr. Timmins answered, “In my opinion it is.” Mr. Berkow then added:
In my opinion, based on the statements that they made to us yesterday clearly indicating that there was no alternative but to come to us with this proposal, that unless we agree to this proposal, they would not be able to meet their commitments that were forthcoming within the next week. And I would say that that would clearly indicate that they would be in an unsafe or unsound condition to continue operations.
Thus it is clear that the true financial condition faced by the Association in March was disclosed to the Board.
Staff recommendations concerning the proposal were then requested by chairman Janis. Mr. Taylor started with this “point of view”:
The picture I painted from the future prospects of the association’s proposal taking effect is so disastrous that I personally would recommend against that proposal.
His reason was stated:
[Tjhis proposal would .. . result in an association that was insolvent; and secondly, . . . the proposal would require the FSLIC to assume the market risk that I think has brought this association to the position that it is in now.
Mr. Ewing felt that “that particular proposal has sufficient uncertainty to cause the FSLIC to be in a very precarious position.” He felt that the Association’s proposal “is not a workable proposal,” his reason being “the uncertainty that the market will stay exactly where it is now and that’s how the losses that they projected were projected.” He added:
I also feel that the cost of carry of the commitments and the borrowings would be sufficiently large enough to, at some point in the future, possibly render the association in an insolvent position. >
General counsel indicated:
The Board would have the authority perhaps to go ahead with the proposal as submitted by the association, although I must say it seems a little far-fetched to me, considering the basic objectives of home financing. I think, however, that there is a great deal on the record here which would suggest that the exposure to the FSLIC is such that in its discretion
*380
the Board could find basis not to go along with this proposal.
He added:
I think the thinking of the economists and the Board itself suggests that this may be throwing good money after bad, including the advance which is now due. I think there seems to be a basis here for the Board to reject this proposal even though there is authority if it were to so find, probably to accept it.
One other staff member, Mr. Hall, commented:
It appears to me, in terms of the proposal made by the association, that if our projections and the projections that OES has made on operating losses of $32 million or $36 million a year are correct or anywhere near correct, that that would not be a solution, it would be a postponement, and in addition, would increase the ultimate exposure of the Insurance Corporation to loss, not only by the market loss which is a gamble at best but also by the depletion completely of net worth.
This led Mr. DiPrete to ask Mr. Hall whether “the year-to-year loss in the range of $30-odd million made it more expensive for FSLIC. Would that make it necessary for FSLIC to backup and consider liquidation?” Mr. Hall answered, “It might, certainly that would be one of the alternatives that the Bank Board would again have to consider in a very short period.of time.”'
Mr. DiPrete’s apparent acceptance of the projected “year-to-year loss in the range of $30-odd million” was similarly voiced by Mr. Janis at another point in the meeting. He had said to Mr. Taylor, “And that they’re anticipating an annual loss of the nature of $34 million?” When Mr. Taylor responded “[o]n the order of $32 million,” Mr. Janis repeated the figure. Mr. Taylor then said, “But in any event, we would be looking forward to an insolvent operation in a very short period of time.”
In accepting the accuracy of the staff projected $32 million loss that the Association would sustain annually under its proposal, Messrs. Janis and DiPrete may well have relied on Mr. Taylor’s explanation of the figure’s source. He noted that while Washington Federal was “trying to work out of this situation, [it would] have an earnings deficit which [the staff] estimate^] to be on the order of $32 million per year. That’s based on current money market interest rates using dollar repos without yield equivalency.”
39
Since the meeting transcript shows that the Board members were aware of R-48, it must be assumed that they knew that Mr. Taylor was talking about the $32 million per year loss incidental to the use of fixed coupon dollar reverse repos. However, none of the earlier or later quoted statements of Board members would indicate that the Board intended to apply R-48 retroactively to the finances of the Association so as to render it already insolvent. Thus in this exchange, chairman Janis, despite R-48, the accounting techniques requirement, still recognized that Washington Federal at that time had a net worth of $12 million:
Mr. Janis: What is their net worth at present?
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Mr. Taylor: Their net worth at present, according to their accounting technique, is $12 million. We have some concern that that involves some accounting techniques that we would not necessarily find acceptable.
Mr. Janis: Well, whether you would or whether you wouldn’t, at the most the net worth is $12 million?
Mr. Taylor: That’s right.
40
In their statements regarding the projected $32 million a year loss, neither Mr. Janis nor Mr. DiPrete indicated that this projected loss, based on a required use of fixed coupon dollar reverse repos under memorandum R — 48, was the basis upon which they voted to deny the Washington Federal proposal. While it is fair to assume that the projected loss was one of the factors which the Board members considered in voting on the proposal, there is no basis for assuming this was the only factor the Board considered.
Shortly before chairman Janis formulated the proposal upon which the Board members voted, Board member Dalton gave five reasons for deciding against its approval:
(1) The proposal “depends on too many variables in the market place.”
(2) It “would require waivers of at least two regulations” [forward commitment regulation and outside borrowing regulation].
(3) It would require waiver of one of our R memos. [Dalton elaborated, “They’re asking for forbearance from accounting techniques; and as I understand it, their proposal is not in accordance with generally] accepted accounting practices.”]
(4) “From the standpoint of both a business judgment and one of public policy, I question the Board’s advisability in approving this type of proposal to an institution that, as I understand it, the staff comments from Mr. Berkow yesterday, we’re dealing with an institution that perhaps is in an unsafe and unsound situation currently.”
(5) “And finally the thing that bothers me about the proposal is the precedent that it would set for the Board in that this has not been done before.”
He ended by stating, “I really don’t see the justification for approving the proposal of Washington Federal.”
While Board member Dalton’s understanding that Washington Federal’s “proposal is not in accordance with generally] accepted accounting practices” was in error (apparently the issue still has not been finally settled by the Financial Accounting Standards Board (FASB) of the AICPA), the four other reasons for his decision are unrelated to R-48. Significantly, neither Mr. Janis nor Mr. DiPrete raised any objection to Mr. Dalton’s statement of reasons for not accepting the Association proposal. Hence there is no basis on which to conclude that they, differently from Mr. Dalton, voted to deny the Association’s proposal exclusively on Mr. Dalton’s third reason relating to R-48. Indeed, the proposal as stated by Mr. Janis listed the request for a $78 million advance and the request for a $510 million guarantee ahead of the Association’s request for forbearance of accounting techniques (R-48).
(2.)
Implicit in Board member Dalton’s comments about memorandum R — 48 is the assumption that the memorandum was binding on Washington Federal. Early in the meeting, OES director Taylor assumed the
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same in describing the Association’s proposal. He said:
And that under this flag that they be permitted to wind down their positions by rolling out the commitments using reverse repos; this would require forbearance from accounting techniques which would force them to account for reverse repos in those transactions as sales and purchases and thereby taking losses.
This is a condensation of R-48, which will now be discussed.
On January 29, 1980 Mr. Taylor issued a memorandum numbered R-48. The memorandum was addressed to the professional staff and dealt with the issue of proper accounting for “dollar reverse repurchase agreements and loans of securities with differing interest rates.” The memorandum stated:
Where the risks of ownership are transferred to the buyer or the security to be repurchased is not substantially identical to the security sold, the transaction involves a sale and purchase and is not a financing transaction.
In applying this general proposition to dollar reverse repurchase agreements, the promulgators looked to whether the transactions involved “the exchange of securities with different coupon interest rates.” Such securities were deemed “not substantially identical,” and hence an exchange of these securities was to be recorded “as sales and purchases of securities at market prices with profits and losses recorded in the period incurred.” Thus, while fixed coupon dollar reverse repos could be treated as financing transactions, yield maintenance agreements had to be “accounted for as sales and purchases of securities at market prices, with profits and losses recorded in the period incurred.”
Plaintiff supports its contention that the Bank Board’s decision to place Washington Federal in receivership was an arbitrary and capricious one by arguing that the staff improperly applied R-48 to Washington Federal and improperly characterized the memorandum in discussions with the Board. Plaintiff asserts that R-48 did not, and does not, have the effect of law, that the memorandum was applied retroactively to reverse repo transactions undertaken by plaintiff, and that the Board was told that R-48 represented generally accepted accounting principles (GAAP) while indeed the American Institute of Certified Public Accountants (AICPA) has not approved the principles stated therein. Plaintiff asserts that it followed an opinion of its independent auditor, Peat, Marwick & Mitchell (PMM). PMM’s local office issued the opinion in a letter on October 26, 1979,
see
n.16,
supra.
Defendants respond that “R-48 is not a real issue here” because the Board did not rely upon it in reaching its conclusions as to the condition of Washington Federal. Instead, defendants state that the staff applied R-48 in evaluating and analyzing Washington Federal’s requests of March 13, one of which was relief from the accounting treatment required by the memorandum. Defendants argue further that the burden was on plaintiff to prove that R-48 does not reflect GAAP and it failed to meet that burden.
Certain fringe evidence suggests that the savings and loan committee within the American Institute of Certified Public Accountants issued an “exposure draft” of a proposed statement of position “Accounting For Dollar Reverse Repurchase and Dollar Repurchase Agreements,” which differentiates the accounting treatment of fixed coupon dollar reverse repos from yield maintenance dollar reverse repos as provided for in R-48. It appears that a second draft, issued March 24, 1980, specified that the statement of position “should be applied prospectively to DRR transactions entered into after 12/24/80.” However, application was “encouraged.” The Financial Accounting Standards Board (FASB) of the AICPA apparently has not yet acted on the draft, the court is told by plaintiff’s counsel.
It is concluded that the issue involving the binding character of R-48 is a legal one. How the Board applied R-48 is a factual question. But to resolve either the legal or factual aspect of R-48, it is unnecessary for the court to determine what is generally
*383
accepted accounting practice concerning the accounting treatment of dollar reverse repos. Indeed, it may be the question is unresolvable until the accounting profession acts.
The court turns first to the legality of R-48 as binding on savings and loan associations. Plaintiff argues that R-48 has neither the force nor effect of law in that it is not a formal rule, interpretative rule, or general policy. Defendants argue that R-48 is an interpretative rule which serves to flesh out 12 C.P.R. § 563.23-3 and which played no part in the Board’s decision to place Washington Federal in receivership.
5 U.S.C. § 553 sets forth the requirements of notice and hearing attending formal rule making. It is not suggested by defendant that such required formalities took place relative to R-48. From the record it is apparent that there was no attempt to formally promulgate R-48. Hence the memorandum cannot achieve the status of a valid agency rule.
Under 5 U.S.C. § 553 (b), excepted from general notice requirements are interpretative rules and general statements of policy. Neither category is defined by the APA. An interpretative rule is distinguished from “a substantive or legislative rule [which] has the force of law.”
Guardian Federal Savings & Loan Assoc.
v.
Federal Savings & Loan Corp.,
589 F.2d 658, 664 (D.C.Cir.1978). “An interpretative rule is merely a clarification or explanation of an existing statute or rule.”
Id.
Interpretative rules generally give the public notice of agency statutory or rule construction.
Id.
R-48 does not clarify or explain the relevant phrase of § 563.23-3, “specific principles or procedures on particular accounting . .. matters.” Rather, the memorandum defines criteria for the “proper accounting treatment” in transactions involving the exchange of securities with different interest rates. Whether the exchange of a security involves a “sale and purchase” or a “financing transaction” turns on whether the “security to be repurchased is not substantially identical to the security sold.” Thus a substantive definition is announced. Even more precisely, the “exchanges of securities with different coupon interest rates” are pronounced to be exchanges of securities that are “not substantially identical” and therefore “must be recorded as sales and purchases of securities at market prices with profits and losses in the period incurred.” Plainly enough, the memorandum speaks substantively and perhaps “legislatively.” Section 563.23-3, to the extent here pertinent, provides that each insured institution shall
(a) Employ such specific principles or procedures on particular accounting or reporting matters as the Corporation may require by regulation or otherwise.
Only by “regulation” may the Corporation require “specific principles.” A substantive regulation, such as R-48, must be promulgated in accordance with the APA.
Likewise, R-48 is not a general statement of policy. “The term ‘general statements of policy,’ has been explicated in the Attorney General’s Manual as embracing ‘statements issued by an agency to advise the public
prospectively
of the manner in which the agency proposes to exercise a
discretionary
power.’ ”
Guardian Federal, supra,
at 666 (emphasis added). Discretion in the administrative officer was a critical factor to the
Guardian Federal
court. “If it appears that a so-called policy statement is in purpose or likely effect one that narrowly limits administrative discretion, it will be taken for what it is — a binding rule of substantive law.”
Id.,
at 666-67.
R-48 contains no discretionary language; securities with different coupon interest rates “must” be recorded as sales and purchases. While R-48 accounting techniques were not, according to Mr. Taylor, being imposed upon the associations, the examiners were being instructed to assess associations according to the principles established therein. The very fact that Washington Federal was seeking relief from R-48 in the form of a “waiver” granted by the Board shows that the OES staff did not have any discretion in applying it.
*384
The foregoing analysis convinces the court, and it is determined, that R-48 had no binding effect on an insured association; and thus, it did not bind Washington Federal. Therefore, it would be arbitrary and capricious, and in violation of law, if the Bank Board had found, but only if it had found, that Washington Federal was insolvent by reason of the application of R-48 to its prior yield maintenance dollar reverse repurchase transactions and if, on that finding, the Bank Board solely rested its decision to place the Association in receivership.
Mr. Timmins was frank to admit that “in his mind,” on January 29, 1980, when R-48 was signed by Mr. Taylor, he applied the memorandum to all of the yield maintenance dollar reverse repurchase agreements that Washington Federal had undertaken in November, December and January. He also agreed that in the Board briefing session on .the morning of March 14 he had “explained to the Board that under R-48 the Association was essentially insolvent.” Nevertheless it is the action of the Board and not the mental process of a staff member that is critical. The Board did not at the afternoon meeting of March 14 apply R-48 retroactively to the finances of the Association so as to render it already insolvent.
R-48 probably led Messrs. Timmins and Saalman on March 13 to calculate the cost of doing reverse repos without yield equivalency, i. e., they analyzed the Association proposal in terms of fixed coupon dollar reverse repos. The Board members may have assumed, as they were in effect told by Mr. Taylor, that it was because of R-48 that “current money market interest rates [were applied] using dollar repos without yield equivalency,” thus resulting under the proposal in “an earnings deficit [estimated] to be on the order of $32 million per year.” Board members may well have believed that it was because of R-48 that, in Mr. Taylor’s words, “[W]e would be looking forward to an insolvent operation in a very short period of time.” Future insolvency due to R-48 may have been one of the factors — although R-48 was only one of five reasons given by member Dalton — considered by Board members in denying the Association’s proposal. But future insolvency is not a statutory ground upon which the Board was authorized to order receivership,
see
section 1464(d)(6)(A)(i), and no such ground was asserted by the Board in ordering the receivership.
In denying the third element of Washington Federal’s proposal, the Board indicated that it believed that R-48 prospectively had a binding effect on the Association. While this was arbitrary and capricious, that did not void the later ordering of the receivership because, as it will be seen, the Board on March 18 did not decide that the Association was insolvent and certainly it did not decide that the Association was retroactively insolvent by reason of the application of R-48.
IV.
A.
Once the Bank Board denied Washington Federal’s request for a $78 million advance to meet March funding commitments, the inability of the Association to transact business on and after March 19 became a reality. Chairman Janis gave standing instructions to work for a voluntary merger as a high first priority. Bank Board and FSLIC representatives were dispatched to Cleveland on Saturday, March 15 to work for a voluntary merger. They were instructed, however, to prepare for a receivership and a simultaneous purchase and assumption transaction in the event the voluntary merger did not materialize.
At the request of Hall of the FSLIC, supervisory agent Muldoon arranged for two unpublicized meetings of savings and loans interested in entering into a purchase and assumption transaction which were held Sunday afternoon, March 16, at the Bond Court Hotel in Cleveland.
The attendees were told that although the purchase and assumption was couched in terms of a receivership, as Mr. Hall put it, “We still had hopes that a consent trans
*385
action could be worked out.” Bids were to be submitted by 5:00 p. m. on March 17; Bank Board representatives felt “it would be necessary to have the transaction consummated by the close of business on March 18.”
Washington Federal was not notified of this meeting. However, at the meeting of its directors on the evening of March 17, Mr. Glueck stated that he had learned of the meeting. Representatives of the Bank Board and the FSLIC attended the Association’s meeting. They submitted to the directors for approval a voluntary merger resolution as a substitute for an earlier one sent to the directors. This new resolution did not name the merger partner or indicate the names of the directors of the resulting association. The merger was conditioned upon the execution of a purchase agreement, providing among other things for the FSLIC to purchase all or substantially all of the GNMA security portfolio “formerly belonging to Washington Federal.” The Association countered with a resolution which provided for release of liability of all officers and directors unless fraud was alleged and proved. It further provided that “any resulting institution [would] enter into term contracts for all present officers of Washington at their current level of income, including all other present benefits.” Accompanying this resolution were directors’ statements at the meeting that they had done nothing wrong. The discussion was at times acrimonious. Bank Board representatives exited after they promised to take up the Association’s proposed resolution with the Bank Board.
Following a telephone communication between the Bank Board staff in Cleveland and chairman Janis and the staff in Washington, the chairman convened a meeting of the Bank Board at 11:00 p. m. Chairman Janis proposed a motion to give guidance to the Cleveland-based staff on how to proceed with negotiations with the Association. The motion was in three parts. First, in response to the Association’s request to know the name of its merger partner, the motion provided that it should be given the name of Broadview Savings and Loan, the successful bidder of those who submitted bids on Monday pursuant to the Sunday sessions. Second, the motion provided that the Bank Board would agree not to pursue any individual actions against the directors of the Association except for any commission of fraud. Third, the Association’s request for the employment contracts of 13 officers for a specific term at the same salaries was rejected.
Mr. Dalton moved to amend the second part to provide for payment of the directors’ attorneys fees should the directors be sued by the Board on any ground other than fraud. Chairman Janis and member Dalton voted to approve the motion as amended. Mr. DiPrete voted to deny the mo

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/1375704. Public record. Not legal advice.