Franklin Savings Association

Franklin Savings Association was an Ottawa, Kansas-based American savings and loan association founded in 1889. Although it began as a conventional thrift institution, it underwent a dramatic transformation in the 1980s under a business plan associated with Ernest Fleischer, its largest shareholder from 1972, and economics professor Wayne Angell. Angell later served as a governor of the Federal Reserve Board. Franklin expanded rapidly, with reported assets increasing from approximately $200 million to more than $11 billion during the decade, before standing at approximately $9.3 billion when the institution was seized in February 1990. The association’s operating model differed substantially from that of a traditional mortgage-focused thrift. It held large positions in mortgage-backed securities and used financial futures, interest-rate swaps, options, discounted securities, and interest-only and principal-only strips in an effort to hedge interest-rate and mortgage-prepayment exposure. Franklin also purchased junk bonds and maintained relatively few conventional home mortgage loans. Its funding base relied heavily on Federal Home Loan Bank borrowings, repurchase agreements, and brokered or telephone-marketed deposits; more than 70 percent of deposits were reportedly obtained through those latter channels. Franklin also acquired the brokerage firms L. F. Rothschild Holdings Inc., Stern Brothers & Company, and Underwood, Neuhaus & Company. The institution described its derivatives and securities activities as risk-management tools rather than speculative positions. It also used portfolio stress testing before similar testing became a formal requirement for the largest U.S. banks under the Dodd–Frank Act. Regulators at the Office of Thrift Supervision nevertheless regarded Franklin as highly leveraged and exposed to unacceptable safety-and-soundness risks. The association was placed into government control during the savings and loan crisis, with reported assets of $9.3 billion and deposits of $4.6 billion at the time of seizure. Franklin’s shareholders and related entities challenged the takeover for more than two decades. In 1990, a federal district court in Kansas found that the seizure lacked a factual and legal basis and determined that the institution had complied with applicable capital requirements under generally accepted accounting principles. The government appealed, and the U.S. Court of Appeals for the Tenth Circuit reversed. The appellate court held that, under the Financial Institutions Reform, Recovery, and Enforcement Act, judicial review was narrowly focused on whether statutory grounds existed in the regulator’s administrative record and gave substantial weight to the regulator’s judgment. The U.S. Supreme Court declined to review the case, leaving the appellate ruling as an important precedent concerning post-seizure review of federally insured banks and thrifts. Subsequent bankruptcy and litigation proceedings continued to address Franklin’s capital position, the government’s claims, and the treatment of shareholder and management claims. Bankruptcy proceedings in 1993 and 2004 included findings that no capital deficiency existed under the relevant accounting analysis. In December 2011, the FDIC stipulated in bankruptcy proceedings that, at the time of the appointment of a conservator, Franklin had GAAP net worth of $388,519,213. The institution’s seizure, the conflicting assessments of its solvency and risk, and the government’s handling of its records and assets remain central to the Franklin case. Franklin Savings Association no longer operates as an independent thrift.

Franklin Savings Association was established in 1889 in Ottawa, Kansas, as a savings and loan association. For much of its earlier existence it operated within the conventional thrift model, gathering deposits and making or holding mortgage-related loans. Its later history was shaped by the deregulation, interest-rate volatility, and financial innovation that affected the American thrift industry in the 1970s and 1980s. Ernest Fleischer became the institution’s largest shareholder in 1972. In 1981, Franklin adopted a new business plan developed with the assistance of economics professor Wayne Angell. The plan pursued rapid balance-sheet growth and made the association an unusually sophisticated participant in securities and capital markets. Its assets reportedly rose from about $200 million to approximately $11 billion during the 1980s. Franklin accumulated substantial mortgage-backed securities and used futures, swaps, options, and structured securities to manage interest-rate and prepayment risk. Its portfolio included deep-discount securities, long call and put options, and interest-only and principal-only strips. Franklin also held junk bonds. Unlike a traditional thrift, it had relatively few ordinary home mortgage loans. Its liabilities were concentrated in Federal Home Loan Bank borrowings and repurchase agreements, while more than 70 percent of deposits reportedly came through brokers or telephone-marketing programs. Franklin expanded beyond thrift banking by acquiring L. F. Rothschild Holdings Inc., Stern Brothers & Company, and Underwood, Neuhaus & Company. The association maintained that these activities represented an advanced hedging program rather than speculative trading. It reportedly subjected its portfolio to stress tests before such procedures became standard regulatory expectations for the largest banks. The Office of Thrift Supervision, however, viewed Franklin as a heavily indebted and troubled institution taking unacceptable risks with depositors’ funds. Regulators also objected to aspects of management compensation, dividends, and the institution’s compliance with safety-and-soundness directives. In February 1990, the government seized Franklin Savings Association. The institution had approximately $9.3 billion in assets and $4.6 billion in deposits. Franklin’s shareholders challenged the action. In Franklin Savings Association v. Office of Thrift Supervision, the federal district court found that the seizure was arbitrary and unsupported by the facts and law presented. The court determined that Franklin had GAAP net worth of $388,519,213 and no less economic value on the relevant analysis. The government appealed. The Tenth Circuit reversed, emphasizing that FIRREA restricted the scope of judicial review and that the regulator’s opinion could establish the statutory basis for seizure even without direct proof of every underlying concern. The Supreme Court declined to hear the appeal. This interpretation became significant for later challenges to federal bank and thrift seizures. Litigation continued through bankruptcy, tort, takings, and shareholder proceedings. Claims brought by the RTC and FDIC against shareholders, directors, and officers reportedly failed at jury trial on the claims that survived earlier dismissal. The FDIC later paid $3.5 million from Franklin-related assets for the defendants’ legal fees and expenses. Bankruptcy opinions in 1993 and 2004 addressed Franklin’s capital and the government’s claims, with the later proceedings finding that no capital deficiency existed. In December 2011, the FDIC stipulated that Franklin had been solvent and fully capital compliant under GAAP at the time of conservatorship, based on the stated net-worth figure. The association did not resume independent operations.

• 2011

  FDIC stipulation on capital compliance

  [1]Franklin Savings Associationen.wikipedia.org

  The FDIC stipulated in bankruptcy proceedings that Franklin had GAAP net worth of $388,519,213 when the conservator was appointed.

• 1991

  Tenth Circuit reverses district court

  [1]Franklin Savings Associationen.wikipedia.org

  The Tenth Circuit reversed the lower court and adopted a highly deferential approach to reviewing the regulator’s seizure decision under FIRREA.

• 1990

  Government seizure

  [1]Franklin Savings Associationen.wikipedia.org

  Franklin was seized in February during the U.S. savings and loan crisis, with reported assets of $9.3 billion and deposits of $4.6 billion.

• 1990

  District court challenges seizure

  [1]Franklin Savings Associationen.wikipedia.org

  A Kansas federal district court ruled that the seizure lacked a sufficient factual and legal basis and found Franklin compliant with the relevant GAAP capital standard.

• 1981

  New growth and capital-markets business plan developed

  [1]Franklin Savings Associationen.wikipedia.org

  Franklin developed a new business plan with assistance from economist Wayne Angell, later a Federal Reserve governor.

• 1972

  Ernest Fleischer becomes largest shareholder

  [1]Franklin Savings Associationen.wikipedia.org

  Ernest Fleischer became Franklin’s largest shareholder, preceding the institution’s later strategic transformation.

• 1889

  Franklin Savings Association founded

  [1]Franklin Savings Associationen.wikipedia.org

  Franklin Savings Association was established in Ottawa, Kansas, as an American savings and loan association.

A highly sophisticated, capital-markets-oriented savings and loan association rather than a conventional community mortgage thrift. Franklin emphasized securities portfolio management and interest-rate risk hedging, while regulators characterized its balance sheet as highly leveraged and its risk profile as unsafe.

• Deposits

  Savings and deposit accounts

  Franklin operated as a savings and loan association and gathered deposits from retail and other sources. Its funding strategy relied unusually heavily on brokered deposits and telephone-marketing programs, which reportedly represented more than 70 percent of deposits, alongside Federal Home Loan Bank borrowings and repurchase agreements.

• Securities and investments

  Mortgage-backed securities portfolio

  The association held a large mortgage-backed securities portfolio rather than relying primarily on traditional individual home mortgage loans. The portfolio exposed Franklin to interest-rate and mortgage-prepayment movements and formed the center of its capital-markets-oriented strategy.

• Risk management

  Interest-rate hedging program

  Franklin used financial futures, interest-rate swaps, options, discounted securities, and interest-only and principal-only strips to hedge interest-rate and prepayment risks. The institution characterized these instruments as hedges rather than speculative positions and reportedly used portfolio stress testing.

• Brokerage

  Brokerage and securities services

  Franklin expanded into securities businesses through the acquisition of L. F. Rothschild Holdings Inc., Stern Brothers & Company, and Underwood, Neuhaus & Company. These acquisitions connected the thrift to investment-banking and brokerage activities beyond ordinary savings-and-loan operations.

• 1990

  Disputed government seizure

  Franklin’s seizure became a major legal controversy because a federal district court found no adequate factual or legal basis for the action, while the Tenth Circuit later upheld the government’s position under a deferential interpretation of FIRREA. Later proceedings and a 2011 FDIC stipulation continued to fuel disagreement over whether Franklin had been solvent and capital compliant when taken over.

  Source

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• 2011

  FDIC stipulation concerning Franklin’s capitalOther

  Background

  Shareholders and related entities continued bankruptcy litigation concerning the legality and financial consequences of the seizure.

  Action taken

  The FDIC stipulated that Franklin had GAAP net worth of $388,519,213 when the conservator was appointed.

  Aftermath

  The stipulation strengthened the historical record supporting claims that Franklin had been capital compliant, although it did not reverse the seizure or restore the institution.

  GAAP net worth. $388,519,213 (At appointment of conservator; stipulated December 2011)

  Source

• 1990

  Government takeover of FranklinOther

  Background

  The Office of Thrift Supervision considered Franklin financially troubled and believed that its risk profile and funding structure warranted intervention.

  Action taken

  The government seized Franklin Savings Association and placed it into conservatorship or related resolution proceedings.

  Aftermath

  The takeover triggered more than two decades of litigation over solvency, regulatory authority, shareholder rights, government losses, and the handling of Franklin’s assets.

  Assets and deposits at seizure. $9.3 billion in assets and $4.6 billion in deposits (February 1990)

  Source

• 1981

  Adoption of a capital-markets-oriented growth strategyStrategy

  Background

  Franklin sought to expand beyond the conventional savings-and-loan model during a period of high interest-rate volatility and financial deregulation.

  Action taken

  With assistance from Wayne Angell, the institution adopted a plan centered on rapid growth, mortgage-backed securities, structured instruments, derivatives, and sophisticated interest-rate risk management.

  Aftermath

  The strategy drove substantial asset growth but left Franklin dependent on wholesale funding and exposed to regulatory disagreement over leverage, securities risk, and safety-and-soundness practices.

  Source

1. 1Franklin Savings Associationen.wikipedia.org