Looking for Lessons From Agency That Mopped Up 1980s Thrift Mess By JOHN M. BRODER

The New York Times
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September 20, 2008
Looking for Lessons From Agency That Mopped Up 1980s Thrift Mess By JOHN M. BRODER

WASHINGTON — Does the Resolution Trust Corporation — the government entity formed in 1989 to dispose of hundreds of failed savings banks and hundreds of billions of dollars in their bad loans and other assets — offer a model for dealing with today’s financial crisis?

Although some lawmakers and former officials are tempted by the idea, other experts say the analogy is faulty and the current situation is vastly larger and more complex than the comparatively contained savings and loan mess of two decades ago.

For the moment, creation of an R.T.C.-style agency is not on the table. The Bush administration’s proposed fix does not envision the creation of a quasi-governmental body like the R.T.C. to put a value on and try to market hundreds of billions of dollars in securities held by banks, trading houses and insurance companies that are at the core of today’s financial freeze-up.

The biggest difference between the mid-1980s crisis and now, and where the R.T.C. model falls notably short, is that the government, which insured the deposits of the failing savings institutions, ultimately became the owner by default of the savings and loans, with all of their bad paper, foreclosed real estate and other assets, some above-par and readily marketable.

In the current crisis, the government is trying to keep private institutions like the American International Group and many commercial banks and investment houses operating while relieving them only of tens of billions of dollars in paper nobody else wants.

The White House, Treasury Department and Federal Reserve are asking Congress to permit existing government entities to become a securities buyer of last resort. It is a more open-ended commitment, in part because the problem crosses international borders and its scope is as yet unknown.

It is also likely to be vastly more expensive. In its six-year existence, the R.T.C. handled 747 failed savings banks and disposed of more than $450 billion in assets. The cost to taxpayers, originally estimated at as much as $500 billion, ultimately totaled $120 billion to $140 billion.

Keith Hennessey, director of the National Economic Council, spelled out why the parallel falls apart in a White House briefing on Friday.

“The R.T.C. term has been used quite frequently in the discussion around this question,” Mr. Hennessey said. “Remember that R.T.C. was an organization that was buying assets or taking assets and disposing of them from institutions after they had failed.”

“What we’re talking about here,” he continued, “is institutions which are still operating and going in and providing liquidity to their bad assets on their balance sheet. So it’s a different model, which is you’re trying to ensure that the firms that make up our financial sector right now can continue to move forward.”

Still, there are voices calling for creation of a mechanism like the R.T.C. to clear the financial sludge off Wall Street and dispose of it in a safe and orderly way. Among them are Paul A. Volcker, the former Fed chairman; Nicholas F. Brady, the former Treasury secretary; and Eugene A. Ludwig, the former comptroller of the currency, who argued for such a step this week in an essay in The Wall Street Journal.

Mr. Ludwig, who served on the board of the Federal Deposit Insurance Corporation, where he oversaw the operation of the R.T.C., said government needed to step in quickly to restore confidence in the markets.

“There has to be something big and bold and government-directed to enter this marketplace as a buyer in order to get it lubricated and liquefied so it can operate on its own,” Mr. Ludwig said. He said the Resolution Trust dispensed “rough justice” but was a useful model for the actions government needed to take today.

“These kinds of government efforts are not perfect, but the tradeoff is clear: efforts such as the R.T.C. have benefited the nation to a greater degree than the direct costs involved,” he said.

Mr. Ludwig cited the example of an earlier government agency, the Depression-era Home Owners Loan Corporation, which provided liquidity to mortgage markets when the banks had no money to lend and which was a predecessor of Fannie Mae, the mortgage guarantor, which was seized by the government two weeks ago.

Another New Deal agency, the Reconstruction Finance Corporation, provided $50 billion in federal financing to ailing sectors of the economy when commercial lending was unavailable. It was disbanded in the mid-1950s.

Allan H. Meltzer, a historian of the Federal Reserve, said the only historical parallel close to the government’s rescue plan was the Reconstruction Finance Corporation. That institution worked, he said, because its leader, Jesse Jones, ran it with autonomy and “brooked no nonsense.” Mr. Meltzer said he doubted Congress would accept that in this case. “With today’s Congress, that is an open invitation to corruption,” he said.

The Treasury Department announced Friday that it was using another Depression-era agency, the Exchange Stabilization Fund, to provide guarantees for money market funds.

Congress created the Resolution Trust Corporation in 1989, years after the damage from the savings and loan debacle became apparent and after several false starts. The government created the Federal Asset Disposition Agency in 1985, but it collapsed because of underfunding and poor management. The federal savings and loan insurance fund then entered into a number of transactions to dispose of failing thrifts, but those efforts, too, fell far short.

The passage of the Financial Institutions Reform, Recover and Enforcement Act at the beginning of the administration of President George H. W. Bush created the R.T.C. as an agency with a limited mandate and a deadline to finish its work. It was given $50 billion, but that amount more than doubled by the time the office went out of business in 1995, a year ahead of schedule.

As the receiver of hundreds of failed savings banks, the R.T.C. acquired good assets along with bad, and in some cases got better returns on its holdings than anticipated. The agency auctioned off hotels, waterfront property and luxury cars, tangible assets that were relatively easy to price, unlike the complex securities and derivatives now at issue.

The seeds of the current crisis were born in the R.T.C.’s asset sales. One of its innovations was securitization of nonperforming loans, the forebears of the mortgage-backed securities that are causing such pain today. The agency also was criticized because it contracted out much of its sales work, employing people from the savings and loans who walked away with rich profits.

Although it may not prove a usable model for today’s financial crisis, the R.T.C. is considered largely a success at the limited mission it was assigned.

“It was quite a remarkable agency,” said Mark K. Cassell, a political scientist at Kent State University who has written a book about the R.T.C. “It is one of the few federal agencies that worked its way out of a job, finished its work and closed up shop.”