Daily Briefing Weekend Edition

An RTC in Reverse?

By Paul Muolo

It was only a matter of time before Washington insiders began comparing the government's pending $700 billion "TARP" program to the Resolution Trust Corp., the S&L bailout agency of yesteryear that liquidated $450 billion of thrift assets.

For now, TARP, or Troubled Asset Relief Program, is a concept that's about to become law. And being such a new idea no one in the Washington - or the mortgage industry for that matter - is quite certain how it will work.

The RTC - created by law in 1989 - was merged into the Federal Deposit Insurance Corp. in 1995.

Over a six-year period it sold loans, junk bonds, real estate, branch networks, mortgage companies and anything else that wasn't nailed down at America's failed thrifts to the highest bidder.

The final bill to the nation's taxpayers: $124 billion. As for TARP, the White House and other politicians pitching the idea hope that after taking control of $700 billion worth of illiquid MBS the government (in time) will recover most of its money. The RTC loss (the $124 billion) is gone forever.

TARP comes at an inopportune time for elected officials - just five weeks before the presidential election. Congress is being pressed by the White House, Treasury secretary Henry Paulson and Federal Reserve Board chairman Ben Bernanke to pass legislation quickly. If not, the consequences are said to be dire: a meltdown of U.S. financial markets, which would lead to a worldwide calamity in terms of dollars and cents.

Treasury's plan is being talked about as an "RTC-like" solution, but it looks more like a "reverse" RTC. TARP involves going concerns that are solvent (at least for now). The RTC only sold assets from failed S&Ls.

Secondly, Treasury would be buying assets at a price that reflects future values - which means the government could hold private-label subprime ABS until maturity.

RTC inherited nearly $450 billion in assets from 740 failed thrifts. It did not have to negotiate prices with the seller. The lion's share of thrift assets sold by the RTC was commercial mortgages, including construction and land loans. The underlying collateral was fairly simple to understand compared to today's toxic subprime waste: ABS, CDOs, CDO-squared and credit default swaps.

RTC employed auctions, sold equity partnerships, and even created the first commercial real estate MBS to get the best price for the taxpayer.

At the height of its activity from 1989 to 1995, the RTC employed 7,000 full-timers. It also contracted with asset management firms, real estate specialists, securities firms and others to list the assets for sale. The RTC was focused strictly on liquidations. It even sold nonperforming loans at a discount.

The TARP program proposed by Treasury is designed to remove troubled assets - including complex collateralized debts obligations - from the balance sheets of ongoing concerns, freeing them up to lend again (so the theory goes).

Mr. Paulson is not contemplating an agency, like RTC, that will be accused of dumping properties or conducting fire sales. Treasury plans to hold and manage these assets and deal with the underlying nonperforming mortgages. At a minimum, homeowners should get some relief, just because Treasury will be purchasing second liens and home-equity lines of credit, which make restructuring the first mortgage so difficult.

Another difference between TARP and RTC: management. The RTC was built and managed by a group of "young Turks" at the FDIC who had been trained and educated for senior management positions.

It is doubtful the Treasury Department has a similar cadre of career staff to undertake such a venture. The Treasury is dependent on its career staff. But the agency is known for running a tight ship with political appointees (usually from Wall Street) filling its senior ranks.

If Messrs. Paulson and Bernanke succeed in getting Congress to enact their version of TARP, it will not resemble the RTC all that much. The RTC had a mandate to sell distressed assets. TARP will have a mandate to hold assets - and to pray for their eventual recovery.