Financing Corporation (FICO)
The Financing Corporation (FICO) was a U.S. government-sponsored enterprise (GSE) within the broader financial regulation category, established in 1987 with the primary purpose of recapitalizing the then-insolvent Federal Savings and Loan Insurance Corporation (FSLIC). FICO achieved this by issuing long-term bonds, the proceeds of which were used to support the FSLIC Resolution Fund. The entity was created amidst the escalating savings and loan crisis to provide much-needed liquidity to the failing thrift industry.
History and Origin
The Financing Corporation (FICO) was chartered by the Federal Home Loan Bank Board in August 1987, under the authority of the FSLIC Recapitalization Act of 1987. Its creation was a direct response to the severe financial distress plaguing the savings and loan industry, which had rendered the FSLIC unable to meet its deposit insurance obligations. FICO's sole initial function was to issue bonds to finance the rebuilding of the FSLIC.
Following the enactment of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) in 1989, the FSLIC was abolished, and its assets and liabilities were transferred to the FSLIC Resolution Fund, administered by the Federal Deposit Insurance Corporation (FDIC). FICO then transitioned to function as a financing vehicle for this Resolution Fund. It issued approximately $8.2 billion in 30-year bonds, with maturities ranging from 2017 to 20198. The principal repayments for these debt obligations were primarily sourced from zero-coupon U.S. Treasury bonds purchased by FICO with capital contributions from the Federal Home Loan Banks (FHLBanks)7. FICO paid off its final long-term debt obligation in September 2019 and commenced its dissolution process in October 2019, in accordance with a plan approved by the Federal Housing Finance Agency (FHFA)5, 6.
Key Takeaways
- The Financing Corporation (FICO) was established in 1987 to recapitalize the Federal Savings and Loan Insurance Corporation (FSLIC) during the savings and loan crisis.
- Its primary function was to issue bonds to finance the FSLIC Resolution Fund, which assumed FSLIC's liabilities after FIRREA.
- FICO's bond interest payments were largely funded by assessments on FDIC-insured institutions, and its principal repayments came from investments made with capital from the Federal Home Loan Banks.
- The entity completed its mission and dissolved in 2019 after all its bond obligations were repaid.
- FICO is distinct from the FICO credit score, which is a consumer credit risk assessment tool.
Interpreting the Financing Corporation (FICO)
The role of the Financing Corporation (FICO) should be understood within the context of federal intervention during a systemic financial crisis. Its establishment reflected a governmental effort to stabilize the financial system and protect depositors without directly appropriating taxpayer funds for the immediate bailout. Instead, FICO served as an intermediary, borrowing from the capital markets and distributing those funds to address the widespread insolvency of thrift institutions. The structure of FICO's funding, involving contributions from the Federal Home Loan Banks and later assessments on insured institutions, aimed to place the financial burden on the industry rather than the general public.
Hypothetical Example
Imagine a period in the late 1980s where many savings and loan institutions are facing widespread defaults on their mortgage portfolios. The FSLIC, responsible for insuring deposits at these institutions, finds its reserves depleted. To avoid a complete collapse and ensure depositors' savings are protected, Congress authorizes the creation of a special entity, similar to FICO. This entity would issue $10 billion in long-term bonds to private investors. The proceeds from these bond sales would then be directed to a newly established fund, managed by an agency like the FDIC, which would then use these funds to resolve the failed thrifts, covering insured deposits and managing the disposition of assets. Over the next 30 years, assessments on surviving banks and thrifts, along with initial government investments, would be used to make the bond payments to investors until the $10 billion debt is fully retired.
Practical Applications
The Financing Corporation (FICO) played a critical role in the resolution of the savings and loan crisis, showcasing a specific mechanism for addressing large-scale financial sector distress. Its practical application was to isolate and finance the liabilities of the FSLIC, allowing for the orderly resolution of hundreds of insolvent thrifts. This approach helped maintain public confidence in the banking system's financial stability and the integrity of deposit insurance.
FICO's existence and eventual dissolution highlight the government's capacity to create temporary entities to manage financial crises. For instance, the Resolution Trust Corporation (RTC), also established by FIRREA, served a similar purpose in liquidating the assets of failed thrifts. The historical context of FICO is relevant for understanding how the U.S. government responds to systemic financial sector challenges, often involving specialized agencies and novel financing structures4. The official dissolution order for FICO by the Federal Housing Finance Agency (FHFA) marked the successful completion of its mandate after all bond obligations were satisfied3.
Limitations and Criticisms
While successful in its mission, the Financing Corporation (FICO), like many government interventions, was subject to scrutiny. A primary criticism revolved around the concept of moral hazard. By implicitly guaranteeing the debt of FICO, and by extension, the broader financial system during a crisis, critics argued that it could encourage future risk-taking by financial institutions, assuming the government would step in during times of distress2.
Another point of contention concerned the allocation of responsibility for FICO's interest payments. After FIRREA, FICO bond payments shifted from FSLIC premiums to Federal Deposit Insurance Corporation (FDIC) Savings Association Insurance Fund (SAIF) premiums. The obligation was later extended to state and national banks, which use the Bank Insurance Fund (BIF), leading to debates about fairness and cross-subsidization among different types of insured institutions. This highlighted the complexities and political challenges inherent in funding crisis resolutions.
Financing Corporation (FICO) vs. FICO Score
The term "FICO" can cause confusion due to another prominent entity known as FICO, which is the Fair Isaac Corporation. The Financing Corporation (FICO) was a temporary, government-sponsored entity created for a specific purpose related to the savings and loan crisis and is now dissolved. In contrast, the more commonly known FICO is a publicly traded data analytics company established in 1956. This company is best known for developing the FICO score, a credit score used widely by lenders to assess a consumer's creditworthiness and the likelihood of defaulting on a loan. While both entities use the acronym FICO, they operate in entirely different realms of finance: one was a government vehicle for crisis resolution (the Financing Corporation), and the other is a commercial enterprise focused on consumer credit risk assessment.
FAQs
What was the main purpose of the Financing Corporation (FICO)?
The main purpose of the Financing Corporation (FICO) was to raise funds through the issuance of bonds to help recapitalize the Federal Savings and Loan Insurance Corporation (FSLIC) and later to fund the FSLIC Resolution Fund during and after the savings and loan crisis.
Is the Financing Corporation (FICO) still active today?
No, the Financing Corporation (FICO) is no longer active. It successfully completed its mission and dissolved in 2019 after all its debt obligations were fully repaid1.
How was the Financing Corporation (FICO) funded?
The Financing Corporation (FICO) was primarily funded through the sale of long-term bonds. The principal for these bonds came from capital contributions made by the Federal Home Loan Banks, while the interest payments were largely covered by assessments collected from FDIC-insured depository institutions.