Appendix I

DOD's Estimated Incremental Costs for

Operation Desert Shield/Storm

Major Contributors to This Report

OVERSTOCKED DEFENSE INVENTORIES

Mr. FAZIO. Over produced inventory?

Mr. BOWSHER. What you have are stocks that run from $45 billion to more than $100 billion in the 1980s, and the unused stocks, according to Pentagon definitions, went from $10 to $30 billion. So, you have huge warehouses of inventory and stocks that just aren't being used, aren't turning over. We have a lot of money invested and tied up in that.

One of the things we are working on and making some progress on, is looking at how the private sector has achieved better inventory turnaround and more modern inventory methods. There is some reluctance in the military to adopt some of those modern techniques. But more and more, as they look at their money being tied up and face tighter budgets, the military is becoming more interested in modernizing their system.

One of the reasons they have such large inventories is that they don't trust their information systems, and therefore they stock at different places and they restock to make sure they have it. And the test always is, "when we need it, do we have it?" But sometimes having excess inventories costs the taxpayer a huge sum of money. I think the "60 Minutes" program, with the photos they showed, indicated very clearly the size of the stocks that are there. That is an area we have worked on very hard for the last few years, and I am hopeful we will get some payoff in the next couple of years.

Mr. FAZIO. Bill did you have a question?

Mr. LEHMAN. I will wait until my time comes.

IMPROVEMENT OF BANK POWERS

Mr. BOWSHER. In banking, S&Ls were a big area. GAO also did an awful lot of work and testified quite a few times before the Banking Committees on banking legislation, and a fair number of our recommendations were adopted in the accounting, auditing, and financial reporting area in the latest bank legislation.

We did not take any position on powers. There was the big debate about whether the banks should have more powers. We did support interstate banking as possibly a good idea. But that was not adopted. But the better controls, we were pleased with what was adopted there.

Mr. LEWIS. Have you taken a position in your reports on banks becoming involved-broadening areas of responsibilities?

Mr. BOWSHER. We have not. We looked at the area and could not find enough evidence to support a recommendation one way or the other. I think that some banks with enhanced powers would do well; others would not do so well and maybe get into trouble. So you are going to have mixed results if you grant those additional powers.

I know some people feel that it would be the salvation of the banking industry if they were to get those additional powers, but you have to recognize that this probably puts a lot of competitors

Mr. LEWIS. Some have suggested they have done such a fantastic job in their field of expertise. You might as well give them some increased responsibilities.

Mr. FAZIO. Mr. Lewis is a former insurance broker.

Mr. BOWSHER. I have heard that. So we did not get into the powers issue. We really concentrated on what we thought was an improvement in controls.

We are monitoring the RTC, which is a big, big effort. Right now RTC holds $200 to $300 billion of assets. We have been somewhat critical of some of the controls they have, but at the same time we recognize what a mess that RTC had in taking over hundreds of failed institutions. In other words, records were not always good. Titles were in terrible shape and, in general, the paperwork was in terrible shape.

I have always said in testimony that I have sympathy for the people who had to put the RTC together.

RESOLUTION TRUST CORPORATION

Mr. SMITH of Florida. Can I ask you about the RTC? I want to know whether or not anybody has asked you yet to study what their policies are with reference to sales of these assets that they take control of, how long they are holding them, whether they are holding them too long because they thought the market would turn around or plunge.

Now the assets are worth much less just by the market forces alone, let alone because of depreciation. Does the ATC let contracts to real estate agents and brokerages, how much is inside dealing like it was at FADA over the years. It is outrageous—a quarter of a million dollars a year or more that the head gets, the guy just retired-I am sorry.

Mr. BOWSHER. You are thinking of Fannie Mae.

Mr. SMITH of Florida. But what the RTC executives are getting. I have heard on fairly good authority that many of the executives are the same people running the failed banks in the first place, the CFOs, the presidents of those banks are hired, because they have experience. The only problem is, you are not sure their experience is what you need. So they go from the payroll of a failed bank to the payroll of the RTC. Has anyone been investigating this?

Mr. BOWSHER. Many of the problems that you cite we have been reporting on. One is the slowness of the procedures, the moving of paperwork so many times. Why, lots of times they were losing control; lots of times the value of the asset was going down.

I have warned the Congress that when it comes to finally liquidating the working capital fund that was set up, you might well see additional losses other than what is written off at the time that an institution is taken over.

And there are many people in the thrift industry that go to work for the RTC. There is no question about that.

To be honest, we have not found a lot of fraud yet. We are worried about that. We are worried about some of those problems.

Mr. SMITH of Florida. You did the FADA study a number of

Mr. BOWSHER. That was a bad scene.

Mr. SMITH of Florida. That was obscene, what was going on.
Mr. LEWIS. What is FADA?

Mr. SMITH of Florida. Federal Asset Disposition Agency. That is what used to be FSLIC's

Mr. LEWIS. I am not supposed to ask those questions, but I wasn't familiar with it.

Mr. SMITH of Florida. I am sorry, Jerry. I think that was FSLIC's disposal arm.

COST OF S&L INSOLVENCIES

Mr. FAZIO. I was wondering if you could put on the record your estimates of the cost to the future and current budgets of the United States from both the Savings and Loan (S&L) cleanup through the Resolution Trust Cooperation and the bank insolvencies.

Mr. BOWSHER. $500 billion remains my best estimate.
Mr. FAZIO. That is still your estimate?

Mr. BOWSHER. Yes, one of the reasons is that we included a factor for growth of the problem, which we thought was going to happen, and it has been happening.

Mr. FAZIO. How do you break it down between the two different types of financial problems and institutions?

Mr. BOWSHER. That is basically the S&L problem. That does not include the bank problem.

COST OF BANKING INSOLVENCIES

Mr. FAZIO. What were your estimates on banking?

Mr. BOWSHER. I have not made an estimate on banking, but I have said the $70 billion might not be enough. That is the $30 billion, if I remember right, for losses, and $40 billion for working capital. That just depends on how many banks are going to be in trouble.

The banking industry thinks it will be able to repay it. Again, I warned, when you borrow $70 billion, which is a huge sum of money, and you have to pay interest on it each year, you have to have quite a lot of cash flow to come back and repay it. You don't really have a fund anymore. You see, now all you have is a line of credit in the Treasury. There is no provision to rebuild the FDIC fund at this point in time. There is just the big hope that the $70 billion will get repaid.

So just how that is going to work out, I am not sure, but I have tried to put people on notice that it might not be possible for the industry to repay that whole thing.

Mr. FAZIO. And they might need to seek additional funds?

Mr. BOWSHER. Yes. What you have got here, I think, is a really unfortunate situation, and that is, starting with fiscal year 1989, you have put a new line item in the federal budget of deposit insurance which used to be a positive cash flow every year. In other words, the financial institutions paid more premiums than ex