The Washington Independent
The Washington Independent

Paulson’s Plan Not a Resolution Trust Corp. Scenario

The stock market leaped giddily in late Thursday’s trading on rumors that Treasury Secretary Henry Paulson Jr. is thinking of a government-led plan that

Camilo Wood
Last updated: Jul 31, 2020 | Sep 19, 2008

The stock market leaped giddily in late Thursday’s trading on rumors that Treasury Secretary Henry Paulson Jr. is thinking of “a government-led plan that would bail out the banks in a Resolution Trust Corp.-type scenario,” in the words of the Wall Street Journal’s “MarketBeat” blog.

Yearnings for an “RTC-type solution” that could hold failing mortgages over the long term have been bandied around on Wall Street and in Congress for months. But the real RTC was nothing like the current buzz.

Illustration by: Matt Mahurin
Illustration by: Matt Mahurin

First of all, the RTC was not a bailout for anyone, and did not buy up bad mortgages from operating banks. A stiff increase in regulatory capital requirements for savings and loans by the Financial Institutions Recovery, Reform and Enforcement Act of 1989, or FIRREA, triggered the insolvency of a large swathe of the S&L industry.

The insolvencies were intentional, FIRREA was expressly a punitive measure, passed in a mood of anger and revulsion at the fecklessness and sheer criminality of so many S&Ls

The RTC was created to sell bonds that would finance the FDIC’s deposit insurance obligations and sell off the assets of the failed S&Ls, which were mostly commercial mortgages. These were assets that the government already owned, as a consequence of paying off depositors. They were not “purchased” from banks.

The head of the RTC, a hard-driving former airline executive, Albert V. Casey, decided that a huge overhang of commercial mortgages on government books could depress property markets for years.

So he packaged them up into large pools –- essentially inventing the Commercial Mortgage Backed Security, or CMBS –- and sold them off in a fire sale that lasted for about two years.

The big Wall Street banks and other investors, like the Bass Bros., made large profits on the sales. Once the RTC portfolio had been cleaned out, commercial property markets sustained a strong recovery.

Wall Street is clearly hoping for a friendly government to reliquify bank books by buying up underwater mortgages at friendly prices, and then holding them for the long term. That may or may not be a good idea. But it has nothing to do with the RTC.

  • Charles R. Morris, a lawyer and former banker, is the author of “The Trillion Dollar Meltdown: Easy Money, High Rollers and the Great Credit Crash.” His other books include “The Tycoons: How Andrew Carnegie, John D. Rockefeller, Jay Gould and J.P. Morgan Invented the American Supereconomy” and “Money, Greed, and Risk: Why Financial Crises and Crashes Happen.”*
Camilo Wood | Every day, to make a conscious decision to do something, say something, or act in a way that will improve my work experience. I assist organisations in disrupting the status quo of transition. I teach them how to turn their community from enduring change to evolving through change using a realistic and repeatable structure.


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