Strong Push for an RTC-Type Solution to the Crisis

The U.S. once purged bad S&Ls for $85 billion. How much would it cost to clean up a much bigger financial crisis? No one seems to know

by Jane Sasseen

As Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke met on the evening of Sept. 18 with congressional leaders, momentum was building for a new Resolution Trust Corp.-style entity. The vehicle would be set up to stem the slide in the markets and halt the erosion of the financial sector.

Just two days earlier, Treasury officials had said no broader entity was needed. But rather than easing market woes, the $85 billion federal bailout of insurer American International Group (AIG) sent new waves of fear through the market, as investors tried to assess what other corporations might suddenly turn up insolvent. With the markets down through midday Sept. 18, and lending among institutions all but grinding to a halt, regulators and lawmakers decided a more systematic approach was needed to keep more institutions from buckling under the strain.

At the hastily called Capitol Hill meeting, Paulson and Bernanke met with House and Senate Republicans and Democrats to discuss current market conditions. Paulson and Bernanke "began a discussion with them on a comprehensive approach to address the illiquid assets on bank balance sheets that are the underlying source of the current stresses in our financial institutions and financial markets," said Treasury spokeswoman Brookly McLaughlin in a statement. "They are exploring all options, legislative and administrative, and expect to work through the weekend with congressional leaders to finalize a way forward."

A Chorus of Demands

With the policy measures taken by Washington so far unable to stop the slide, there had been growing calls in recent days for a more systematic approach modeled on the RTC, which was set up in the late 1980s to restructure the underwater mortgages held by nearly 750 insolvent savings and loan institutions. "Lesson No. 1 from that era is: Move quickly. Troubled assets don't become more valuable over time; they become less valuable," said Richard Breeden, the RTC's architect and a former Securities & Exchange Commission chairman.

The idea has drawn powerful supporters: ex-Treasury Secretary Lawrence Summers and former Federal Reserve chairmen Alan Greenspan and Paul Volcker have recently backed it, while lawmakers ranging from Representative Barney Frank (D-Mass.), the influential head of the House Financial Services Committee, to Senator Richard Shelby (R-Ala.), the top Republican on the Senate Banking Committee, said early in the week that a new RTC should be considered.

Both Presidential contenders have also said such an approach was needed. "I am calling for the creation of the Mortgage & Financial Institutions Trust—the MFI," Senator John McCain (R-Ariz.) said Sept. 18. "The priorities of this trust will be to work with the private sector and regulators to identify institutions that are weak and take remedies to strengthen them before they become insolvent. For troubled institutions, this will provide an orderly process through which to identify bad loans and eventually sell them." Senator Barack Obama's (D-Ill.) rhetoric was similar: "I'll call for the passage of a Homeowner & Financial Support Act that would establish a more stable and permanent solution than the daily improvisations that have characterized policymaking over the last year."

How would an RTC-like entity help? The original RTC sold off the restructured loans as the market improved, rather than in a quick-fire sale, thus lessening the cost of the savings and loan crisis to the economy and to taxpayers.

An Undercapitalized System?

One key difference between the 1980s S&L affair and today's financial crisis is that the government had already taken over the insolvent banks by the time it created the RTC. In effect, Uncle Sam already owned the assets and set the agency up to facilitate a smooth liquidation.

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