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Return of the Resolution Trust Corp.?


Some powerful advocates are calling for a new agency to oversee debt restructuring

In the late 1980s, Washington created the Resolution Trust Corp. to restructure the mortgages held by 750 insolvent savings and loans. By selling off assets over time rather than in a fire sale, the RTC lessened the cost of the crisis to taxpayers.

So far, the feds' ad hoc solutions have failed to stem the crisis, leading many people to call for a new RTC. Ex-Treasury Secretary Lawrence H. Summers and former Federal Reserve Chairmen Alan Greenspan and Paul Volcker are backers, as is Representative Barney Frank (D-Mass.), the powerful head of the House Financial Services Committee. Treasury Secretary Henry Paulson has rejected the idea. But if things get worse, "the odds rise in the next Administration," says Tom Gallagher, head of policy research at broker ISI Group.

A new RTC would be a buyer of last resort. It might buy the mortgages and related debt from banks at a heavy discount or in exchange for equity. Or it could let troubled institutions go bust, then liquidate those assets in an orderly fashion. "Rather than seeing forced sales for 10 cents on the dollar, the government could take its time and get, say, 40 cents on the dollar," says Lawrence J. White, an economics professor at New York University.

There are problems, though. The RTC took on some $225 billion in junky S&L assets and sold them for $140 billion, but today's price tag could be far higher. And restructuring the complex mortgage-backed securities that are at the heart of the 2008 crisis would be much tougher than working out simple home loans. Finally, "doing this would be an admission that we are in deep, deep trouble," says Brad W. Setser, a former Treasury official who is now at the Council on Foreign Relations. But, he adds, "if the situation doesn't stabilize, we have relatively few policy options left."

With Theo Francis in Washington

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