Resolution Trust Corporation History by DocHack

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The Resolution Trust Corporation was set up in the late 1980s to absorb the assets and debts from failed financial institutions during the savings and load crisis. This document delves into the history of the Resolution Trust Corporation, looking back at the results.

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									                                    Housing Policy Debate • Volume 1, Issue 1       53

The Resolution Trust Corporation in
Historical Perspective
Bert Ely
Ely & Company, Inc.

This paper contrasts the asset disposition challenges facing the Resolution Trust
Corporation (RTC) with similar challenges that faced two earlier government
agencies: the Home Owners Loan Corporation (HOLC) and the Federal Asset
Disposition Association (FADA).

The paper first compares the quantity and diversity of RTC assets with the some-
what fewer but more uniform assets (one- to four-family homes) sold by the HOLC.
The FADA’s challenge was quite modest compared with the RTC and the HOLC.
The paper then contrasts current RTC policy issues with those that arose with the
HOLC and the FADA. The paper does not, however, make specific policy recommen-


The Financial Institutions Reform, Recovery and Enforcement Act of
1989 (FIRREA), which became law on August 9,1989, created the
Resolution Trust Corporation (RTC) to act as the federal government’s
agent in disposing of insolvent savings and loans (S&Ls). RTC is the
third special government corporation charged with disposing of mas-
sive quantities of troubled real estate. The first was the Home Owners’
Loan Corporation (HOLC), created in 1933 to refinance home mort-
gages and, when necessary, to foreclose on defaulted mortgages and
sell the foreclosed houses. The second was the Federal Asset Disposi-
tion Association (FADA), which was created in 1985 to manage and sell
assets owned by the Federal Savings and Loan Insurance Corporation

This paper examines the challenges facing RTC in the context of the
historical experience of HOLC and FADA. The paper contrasts the size
and scope of RTC’s mission with that of its predecessors and then
compares the challenges facing RTC with those that faced HOLC and
FADA. It also discusses policy issues confronting RTC, the Bush
Administration, and Congress. Specific policy recommendations,
though, lie beyond the scope of this paper.
54   Bert Ely

RTC’s mission in historical perspective

RTC has two basic missions: to dispose of the deposits, branches, and
good assets of insolvent S&Ls and to sell those bad or problem assets
that the acquirers of the S&Ls’ deposits do not want to purchase.
Problem assets fall into two categories: tangible assets, mostly fore-
closed real estate, to which the S&L has established clear title; and
intangible assets, such as nonperforming loans, loans in process of
foreclosure, and equity interests in corporations, partnerships, and
joint ventures where the S&L does not have clear title to the tangible
assets financed by these loans and equity interests.

The primary focus of this paper is on RTC’s more difficult mission: the
sale of problem assets that remain once RTC has disposed of the
deposits, other liabilities, and good assets of an S&L. The sale or
liquidation of an insolvent S&L’s deposits, branches, and good assets is
a relatively straightforward process that, with two exceptions, is
beyond the scope of this paper. These exceptions are selling viable
S&L deposit franchises and funding the liquidation of the rate-sensi-
tive deposits in these S&Ls.

HOLC also had two missions, although the scope of its second mission
was not immediately evident when it was created on June 13,1933.
HOLC’s primary mission was “. . . to refinance home mortgages, to
extend relief to the owners of homes occupied by them and who are
unable to amortize their debt elsewhere . . . , and for other purposes.” 1

The need for a massive refinancing of home mortgages that drove the
creation of HOLC arose for several interrelated reasons: home mort-
gages issued before the Great Depression usually did not fully amortize
the loan principal over the three- to five-year life of most mortgages;
instead, the loan was routinely refinanced when it matured.2 However,
the general price deflation of the early 1930s and the resulting decline
in home prices created numerous situations where insufficient owner’s
equity remained in the house to collateralize adequately a mortgage
refinancing. According to the author’s calculations based on one study
(Harriss, table 17, p. 60), 60 percent of the mortgages refinanced by
HOLC were on homes that had lost at least 15 percent of their market
value. Refinancing also was complicated because many homeowners
had lost their jobs or suffered income losses during the Great Depres-
sion. These losses impaired homeowners’ ability to make timely mort-
gage payments.

During its three-year period of authorized lending activities (1933-36),
HOLC directly refinanced more than one million home mortgages.
However, HOLC eventually had to foreclose on 198,000 of these loans,
               The Resolution Trust Corporation in Historical Perspective   55

almost 20 percent of the mortgages it refinanced. These foreclosures
created HOLC’s second mission: the sale of foreclosed homes. This
second mission parallels RTC’s task of selling the problem assets of
insolvent S&Ls.

FADA was created with just one mission: to manage and to sell prob-
lem assets, mostly real estate or legal interests in real estate, to which
the FSLIC had acquired title when it sold or liquidated insolvent S&Ls.
Unlike HOLC, which was a federal agency, FADA was created in 1985
by the Federal Home Loan Bank Board as a privately controlled,
federally chartered mutual S&L with the express purpose of bypassing
federal restrictions on employee pay levels and contracting practices.
FADA immediately faced political difficulty, however, caused in large
part by the political ineptness of some early management. As a conse-
quence, FIRREA directed that FADA be sold or liquidated. During its
short life, however, FADA was able to sell approximately $1.5 billion of
real estate and restructured loans.3

RTC’s many challenges

RTC faces enormous challenges. Their size and complexity far exceed
the breadth of the relatively simple charge of HOLC, even though
HOLC also dealt in large numbers. While FADA dealt with complex
problems, the scale of its operations was modest compared to what
faces the RTC.

According to testimony that Treasury Secretary Nicholas Brady deliv-
ered to the Senate Banking Committee on May 23,1990, RTC will
have to dispose of between 722 and 1,037 S&Ls with total assets
between $408 billion and $560 billion. Secretary Brady estimated that
the present value cost of disposing of these S&Ls ranges between $89
billion and $132 billion. The Secretary’s testimony did not quantify the
amount of problem assets in these S&Ls, but he noted that RTC
conservatorships held a total of $160 billion of assets at March 31,

Table 1 prepared by the author from financial data filed by S&Ls with
the Office of Thrift Supervision COTS), shows a slightly smaller number
of insolvent and failing S&Ls and a lower amount of assets in these
S&Ls than the figures reported by Secretary Brady. Specifically, OTS
data suggest that at least 703 S&Ls have failed or will fail (Groups 1 to
3), and as many as 940 S&Ls have failed or will fail (Groups 1 to 4). In
                        Table 1. Summary Data on Savings Association Insurance Fund-Insured S&Ls

                                     Based on December 31, 1989, Financial Report Data
                      S&Ls in Operation on May 18, 1990 plus S&Ls Sold or Liquidated Since August 9, 1989
                                                (In Thousands of Dollars )
                                                                                                                                                      Bert Ely

                                              [1]    [2]                 [3]              [4]            [5]             [6]             [7]
                                            Number Adjusted            Adjusted
Group                                          of  Tangible            Tangible       High Risk       Low Risk          Total           Total
Number                                       S&Ls Net Worth             Assets         Assets          Assets          Deposits       Liabilities

1. S&Ls disposed of since August 9, 1989*      111     ($10,147,614)   $24,509,893    $9508,781      $15001,112      $29,319,831      $31,937,491

2. S&Ls currently in conservatorship           316   (26,777,863)      167,993,632    48,374,448     119,619,185     144,258,842      194,771,495

3. S&Ls with negative net worth after          276     (6,741,062)     181,498,919    43,283,881     138,215,038     138,794,684      188,239,980
     additional loss provisions
       Subtotal: Groups 1 to 3                 703   (43,666,539)      374,002,444   101,167,109    272,835,334      312,373,357     414,948,966

4. S&Ls with 0%-2% tangible capital            237       1,891,471     165609,718     37,212,120     128,397,598     123,746,060      163,718,247
     after additional loss provisions
       Subtotal: Groups 1 to 4                 940   (41,775,068)      539,612,161   138,379,229    401,232,932      436,119,417     578,667,213

5. Rest of the industry                      1,975     35,858,921      693,121,041   103,890,680    589,230,361      522,877,479     657,262,120

Total industry                              2,915      (5,916,148) 1,232,733,202     242,269,909    990,463,293      958,996,896    1,235,929,333

*Data as of last quarter reported for institutions that have been resolved.

Note: High-risk assets include 100% of foreclosed assets, real estate owned for investment, delinquent loans, service corporation investments, junk
bonds, equity stock, and excess loan servicing plus 75% of non-delinquent construction and land loans (net of loans-in-process) plus 50% of non-
delinquent, permanent multifamily and nonresident mortgages plus 25% of commercial, auto, and mobile home loans. This amount is net of existing
loan loss reserves. Low-risk assets include all other assets.
                The Resolution Trust Corporation in Historical Perspective   57

developing this table, the author has identified specific S&Ls that will
fail; the Treasury Department has not released a comparable identifi-
cation. Therefore, the author has used the data underlying this table
to draw more specific conclusions for this paper than can be drawn
from Secretary Brady’s testimony.

In late 1989, RTC began marketing 35,000 pieces of real estate that it
owned or that were owned by the 280 S&Ls then in the RTC
conservatorship program.4 The total net book value of these assets was
approximately $10 billion ($10.1 billion on June 30,1989, according to
the author’s estimate), which yields an average net book value of
almost $300,000 for these assets. Assuming that this average value
applies to the entire $80 billion in potentially troublesome real estate
assets RTC eventually must sell, RTC may have to dispose of as many
as 270,000 pieces of real estate, or almost 1 1/2 times as many assets as
HOLC sold.

This is most likely a low estimate of the total number of assets RTC
must eventually liquidate. According to the 1989 financial results for
the FSLIC Resolution Fund (successor under FIRREA to the FSLIC)
issued by the FDIC on May 23, 1990, 294,000 distinct assets were
owned by FSLIC liquidating receiverships or covered by FSLIC assis-
tance agreements. These assets had a current value of $48.8 billion.
This total value gives an average value for these 294,000 assets of
$166,000, or just 55 percent of the author’s estimated average value of
the assets RTC must sell or otherwise liquidate. The RTC also adver-
tised in The Wall Street Journal (May 17,1990) for a computerized
“asset management system” that would be used to manage 200,000 to
300,000 assets.

FADA operated on a relatively modest scale: it was charged with
selling just $4 billion worth of property, of which it sold $1.5 billion.
Compared with HOLC on an inflation-adjusted basis, however, RTC
will dispose of real estate and real estate interests worth more than
seven times the present-day $11 billion value of the houses HOLC sold.
The “capital value” or book value of the 198,200 homes sold by HOLC
was $940 million (HLBB “Final Report,” March 1, 1952, Schedule 14).
This amount includes unpaid loan balances, accrued interest, taxes,
foreclosure costs, and other carrying charges, but excludes repair and
reconditioning costs. The $940 million amount was increased by the
ratio of the gross national product (GNP) deflator (1982 = 100) for
residential fixed investment (new housing) for the first quarter of 1990
(126.9) divided by the GNP deflator for residential fixed housing in
1940 (10.9). The year 1940 was selected since 50 percent of the
HOLC’s eventual house sales were achieved by that year: $940 million
x (126.9/10.9) = $10.9 billion. $80 billion/$l0.9 billion = 7.3. Because
58   Bert Ely

the problem assets of many insolvent S&Ls already have been written
down substantially, the original investment in these properties, plus
accrued interest and other carrying charges, far exceeds $80 billion.

There is another perspective on the size problem facing RTC that
neither HOLC nor FADA ever confronted: the massive deposit shrink-
age that must occur in the insolvent S&Ls. As shown in Table 1,
Column 6, the 703 S&Ls most likely to be sold (as determined by the
author) had total deposits of $312 billion. This was calculated using
figures from the earlier of either the quarter which ended before the
S&L was sold or liquidated, or December 31, 1989. Based on financial
report data filed with the OTS by all Savings Association Insurance
Fund (SAIF)-insured institutions, $87 billion of the $312 billion was in
deposit accounts with balances over $80,000. Expanding this group of
S&Ls to include the 237 marginal S&Ls in Group 4 brings total depos-
its to $120 billion in accounts with balances over $80,000.

These deposits have little appeal to the buyers of insolvent S&Ls
because the high rates paid on these very rate-sensitive balances make
them an unprofitable source of funding for the type of assets banks and
S&Ls are now permitted to own. According to the author’s review of
the deposit structure of all SAIF-insured S&Ls as of December 31,
1989, another $80 billion of deposits in these S&Ls, in accounts with
balances under $80,000, also may be fairly rate sensitive and equally
unattractive to the buyers of these S&Ls.

Thus the buyers of insolvent S&Ls, or more specifically the buyers of
deposits in these institutions, almost certainly will find it necessary to
liquidate at least $87 billion and perhaps as much as $200 billion of the
deposits in these S&Ls. Expressed another way, one-third or more of
the total deposits in the S&Ls that RTC is most likely to dispose of may
disappear because of RTC liquidations of S&Ls and the selective
liquidation of S&L deposits RTC is able to sell to banks, healthy S&Ls,
and other private-sector parties.

Diverse assets
RTC has been charged with managing and selling an extremely wide
variety of assets, including houses, apartments, office buildings, shop-
ping centers, warehouses, hotels and motels, land developments, raw
land, operating businesses, and a miscellanea of sometimes exotic
assets. Where RTC does not obtain clear title to a tangible asset, it
may have to sell the loan or an equity interest in that asset. In rather
sharp contrast, the assets HOLC managed and sold were relatively
homogeneous. Most were one- to four-family homes, although HOLC
                The Resolution Trust Corporation in Historical Perspective   59

also sold about 140,000 seasoned, performing loans (Harriss, 179-80).
FADA managed and sold a diverse range of assets, but not of the
magnitude facing RTC.

Foreclosure hurdles

RTC’s asset disposition problems will be greatly compounded because,
for approximately $55 billion of these problem or high-risk assets,5 RTC
must either convert a loan in default to a performing loan that would
be saleable, or it must obtain clear title to the underlying tangible asset
(mortgage collateral or the asset in which the S&L made an equity
investment). In most cases, the loan probably cannot be restructured
satisfactorily, so the S&L must foreclose on it or otherwise act to obtain
clear title to the underlying asset that served as collateral for the loan.

Obtaining clear title to an asset is expensive and time consuming; the
task can easily take two or three years. This process usually entails
complicated court proceedings that the borrower often contests or
otherwise stalls. Borrowers, for example, may challenge appraisals by
showing that they have no equity in the property, or they may file
lender liability suits alleging that the S&L, which is no longer in
business, did not deal fairly with the borrower when the loan was
made. Because state law dictates foreclosure proceedings, RTC’s
foreclosure experience will vary dramatically from state to state. In
many cases, these foreclosures will be time-consuming events. Fortu-
nately, Texas, where as many as half of RTC’s foreclosures will occur,
does have a rapid foreclosure process.

If the insolvent S&L holds a participation in a defaulted loan made by
an S&L not under RTC’s jurisdiction, then RTC has no control over the
foreclosure proceedings. The other S&L may not aggressively pursue
foreclosure because a successful foreclosure would force it to recognize
a loss that, to date, it has avoided recognizing. In this situation, RTC
will do nothing, attempt legally to force the other S&L to foreclose, or
buy out the other S&L’s interest in the loan so that RTC can begin the
foreclosure action. None of these alternatives can be pursued quickly
or cheaply.

Problem assets in many S&Ls also include ownership or equity inter-
ests in joint ventures, partnerships, and corporations that have in-
vested in real estate projects in legal and/or financial difficulty. For
example, RTC may not be possible to sell a property quickly if a joint
venture partner wants to postpone the sale until the property has
appreciated in value or if all the partners must give unanimous consent
60   Bert Ely

to the sale. If the joint venture partner is in bankruptcy, an over-
worked bankruptcy court must approve the sale.

Foreclosures were also a major problem for HOLC, but one it mastered
reasonably well, partly because the loans on which it foreclosed were
straightforward: HOLC had made the loan that later went into de-
fault; its loan was the senior lien on the property, usually a single-
family home; and HOLC did not enter into loan participations, joint
ventures, or more exotic property-development schemes. Like RTC,
though, HOLC was subject to state foreclosure laws. Thus, average
foreclosure times varied greatly, ranging from less than one month in
five states to over a year in nineteen states (Harriss, 84-5).

Although FADA attempted to sell both real estate and nonperforming
loans owned by FSLIC, most of the sales involved owned real estate
rather than restructured loans.6


RTC has two major funding needs. First, it must cover or pay for the
“net insolvency loss” in all the S&Ls placed under its control. The net
insolvency loss equals the amount of an S&L’s insured or collateralized
liabilities minus the current market value of its assets. Second, RTC
must have sufficient working capital with which to finance the assets
retained when it sells or liquidates an S&L. In effect, RTC uses work-
ing capital by substituting cash for the assets retained when selling or
liquidating an S&L. Some months or years later, RTC regains that
cash and thus rebuilds its working capital when it sells the retained

FIRREA provided RTC with $50 billion to cover net insolvency losses.
Of this amount, $18.8 billion was provided in cash from the U. S.
Treasury in fiscal years 1989 and 1990; $1.2 billion was transferred to
RTC from the 12 Federal Home Loan Banks; and $30 billion has or will
be raised through bonds sold by the Resolution Funding Corporation.

Early indications are that buyers of insolvent S&Ls do not want to
assume title to the problem assets of these S&Ls.7 In these situations,
RTC must substitute cash for the nonperforming loans, loans in foreclo-
sure, and equity interests in property it has to retain when selling or
liquidating an S&L.

There are two reasons why buyers of insolvent S&Ls want to keep only
the most liquid assets in these institutions. The obvious reason is that
                The Resolution Trust Corporation in Historical Perspective   61

they do not want the risks and turmoil of owning problem assets.
These buyers, almost always banks and other S&Ls, usually are not in
the business of managing problem assets. They want to focus, instead,
on building the deposit-taking business of the acquired S&L. The less
obvious reason is that these buyers need cash from RTC to liquidate
the very short-term, rate-sensitive deposits they have acquired.

The short-term maturity structure of S&Ls in conservatorship is
readily apparent from an OTS news release (no. 90-41, March 7,1990)
that provided December 1989, figures separately for SAIF-insured
S&Ls in conservatorship versus those not in conservatorship. S&Ls in
conservatorship in December, taken as a group, were offering signifi-
cantly higher interest rates on certificates of deposits (CDs) with
original maturities of less than six months compared with S&Ls not in
conservatorship. The rate differential for CDs under $80,000 was 23
basis points (.23 percent) for one- to three-month CDs and 22 basis
points for three- to six-month CDs. Comparable differentials were
noted for CDs with balances over $100,000. The picture was reversed
for longer-term CDs. For CDs with an original maturity of one to two
years, the S&Ls not in conservatorship were paying 1 basis point more.
For CDs with a maturity beyond two years, the S&Ls not in
conservatorship were paying 11 basis points more.
The most startling rate differential was found in Money Market De-
mand Accounts (MMDAs). In December 1989, the S&Ls in
conservatorship were paying 66 basis points (.66 percent) more than
their stronger brethren. The magnitude of this differential has existed
since at least March 1989. S&Ls in conservatorship in December also
were paying 21 basis points more on interest-bearing transaction
accounts. This differential is down somewhat, however, from the 38
basis point differential these S&Ls were paying in the spring of 1989.
Because MMDAs and transaction account balances can be withdrawn
simply by writing a check, they will disappear quickly once rates on
these accounts are trimmed to more reasonable levels.

RTC’s peak working capital need can be estimated only roughly.
However, based on the following set of assumptions, it could easily
peak at $50 billion in 1993 before dropping back to zero by the end of
the year 2000. The assumptions are (1) all 703 of the weakest S&Ls
are sold at a steady rate over the next six years; (2) an average of $25
billion annually in assets is retained from these S&Ls, and the cash
substituted for these assets would enable the S&L buyers to liquidate
fully all deposits in accounts with balances over $80,000, plus some of
the high-rate balances in accounts with balances under $80,000; and
(3) RTC sells the retained assets steadily over the five years following
the S&L’s sale.
62   Bert Ely

How and where RTC is going to obtain $50 billion in working capital is
an unresolved question. Section 21A(j) of the Federal Home Loan
Bank Act (FHLBA) provides that the RTC can borrow for working
capital purposes an amount equal to no more than (1) its cash on hand;
(2) the unissued amount of its authorized borrowings from the Resolu-
tion Funding Corporation (REFCORP); and (3) 85 percent of the fair
market value of its noncash assets.8 However, this need to borrow is
unavoidable since the buyers of insolvent S&Ls have no choice but to
liquidate that portion of the acquired deposits on which they cannot
earn an acceptable profit. Borrowing to obtain this working capital
would be in addition to the $50 billion provided by FIRREA to cover
RTC’s net insolvency losses if RTC’s peak need for working capital
occurs after receipt of all proceeds from the $30 billion in bonds the
REFCORP is currently authorized to sell. As of April 15,1990,
REFCORP had sold $13 billion in bonds. Based on planned quarterly
sales of these bonds, REFCORP will sell $30 billion in bonds by mid-

The accelerated sale of insolvent S&Ls announced by the Oversight
Board on April 12,1990, increases RTC’s peak working capital needs
and advances the date on which that peak will be reached. However,
the author has determined that RTC will reach its debt ceiling set in
FIRREA before it reaches that peak. Conceivably that ceiling will be
reached in the fall of 1990.

Funding for HOLC was never a serious issue. The legislation that
created HOLC authorized it to issue up to $4.75 billion in bonds.
However, HOLC used only $3.49 billion of this authority and never
suffered from funding limitations. HOLC also had limited working
capital needs since its inventory of foreclosed houses was largely
funded by the initial borrowings for funding the mortgages on which it
later foreclosed. However, HOLC spent $260 million on its foreclosed
houses before their sale to pay for taxes, repairs, insurance, foreclosure
costs, and interest. These costs constituted a major portion of the $337
million loss HOLC suffered on the sale of these homes. This loss was
fully covered by the net interest earnings of HOLC’s mortgage portfolio
(“Final Report,” Schedule 2, sheet 2).

Funding also was not a major concern for FADA because it did not hold
title to any assets it sold for the FSLIC. FADA’s operating expenses
and losses, however, became a major political issue that contributed to
its demise.
                The Resolution Trust Corporation in Historical Perspective   63

Geographical considerations will play a major role in RTC’s long-term
financial results because its problem assets are concentrated in west-
ern and southwestern states. Geography was a factor in HOLC’s
experience, but not a significant one. FADA’s activities also were
concentrated in the Southwest.

S&Ls headquartered in six western and southwestern states (Louisi-
ana, Texas, Oklahoma, New Mexico, Colorado, and Arizona) own
approximately half of the high-risk assets in the 703 cases RTC will
most likely address. Insolvent Texas S&Ls alone held high-risk assets
totaling $38 billion, or about two-fifths of the national total for all
insolvent S&Ls. Insolvent S&Ls headquartered in California held $11
billion of high-risk assets, but many of these assets are physically
located in other states, most notably Texas. The same is true for many
of the high-risk assets owned by insolvent S&Ls with headquarters
elsewhere in the country. Thus, it is quite likely that over one-half of
all of the high-risk assets owned by the 703 S&Ls most likely to fail are
located in Texas. This concentration of problem assets greatly com-
pounds the challenge of asset sales facing RTC.

HOLC also experienced an asset concentration problem, but this paled
in comparison to the problem confronting RTC. HOLC experienced its
highest foreclosure rates, as a percentage of the original mortgages it
made in New York (43 percent), Massachusetts (41 percent), and New
Jersey (38 percent). The lowest foreclosure rates were in the Pacific
Coast states (10.9 percent) and the Mountain states (11.2 percent).
Texas experienced a 17.9 percent foreclosure rate. Thirty percent of
the homes on which HOLC foreclosed were in New York, New Jersey,
and Massachusetts (which collectively had almost 17 percent of the
nation’s population), while only 29 percent of the foreclosed homes
were in the states west of the Mississippi, which collectively had 31
percent of the nation’s population. Thus, although HOLC had a differ-
ent geographic concentration of problems, they were not so concen-
trated as those facing RTC.9

Why HOLC experienced such a particular geographic mix of foreclo-
sures is an interesting question. While local economic conditions
played a role, so did such administrative factors as differences in the
quality of loan servicing from one region to another; regional variations
in granting favorable terms on loan extensions; and differences in
“. . . general standards of strictness towards borrowers” (Harriss, 76).
64   Bert Ely

Asset deterioration

Asset deterioration is a major but as yet unquantified problem facing
RTC, just as it was for HOLC. It is a key reason why future asset
write-downs will occur on the problem assets now held by insolvent

Foreclosed real estate ($26 billion in the 703 most likely RTC cases)
often suffers deterioration, if not outright vandalism, because these
properties are vacant or largely unoccupied. In addition, minimal or
negative cash flows generated by these properties limit the monies
available to perform even routine maintenance. Maintenance prob-
lems will be exacerbated if RTC is starved of sufficient working capital.
In just a few months, a poorly maintained property can begin to show
visible signs of deterioration that detract from its selling price. If not
corrected, an accelerating rate of deterioration will drive a property’s
selling price to less than the value of its land because of the cost of
clearing away a now worthless building. The deterioration rate will be
even greater if a foreclosed structure is badly or incompletely con-

Asset deterioration can be an even worse problem in a property fi-
nanced by a nonperforming loan or a loan in foreclosure since the
property owner-borrower usually has even less incentive and cash flow
to maintain properly the S&L’s loan collateral. Lax or legally delayed
foreclosure proceedings only worsen the problem. Construction loans
also present another great potential for asset deterioration since an
abandoned construction project will crumble and erode very quickly,
particularly during the winter months. Land loans, which often fund
roads, sewers, and utilities, will lose value similarly as these infra-
structure investments deteriorate.

HOLC also had costly deterioration problems among its foreclosed
homes. Reconditioning and repair costs equalled 11 percent of the
original amount of the foreclosed loans. Despite these outlays, HOLC
experienced a 33 percent loss of its investment in foreclosed houses
when selling these properties (“Final Report,” Schedule 14; Harriss,
120). Its investment included the unpaid balance of the foreclosed
mortgage, interest, repairs, taxes, and selling costs. This loss was four
times worse than the roughly comparable foreclosure and sale experi-
ence of the life insurance companies (Harriss, 125).

Four reasons for HOLC’s poor experience relative to its private sector
competition suggest why RTC will not fare well in managing and
selling its problem assets (Harriss, 124-26). First, HOLC sold many of
its properties before “boom prices could be obtained.” HOLC did not
                The Resolution Trust Corporation in Historical Perspective   65

deliberately sell before the boom since it could not foresee the boom,
but sales of its foreclosed houses were hurried partly due to Congres-
sional pressures. These same pressures are just beginning to build
upon RTC. Second, the life insurance companies generally had made
higher quality loans, in large part because the overwhelming bulk of
HOLC’s loans were made in distressed cases. In particular, HOLC
loans on average were made at 70 percent of an often generous ap-
praised value, while life insurance company loans during the 1920-35
period averaged 53 percent of appraised value. Third, the geographical
distribution of the foreclosed loans was somewhat more favorable to the
insurance companies. Finally, HOLC was more lenient than the
insurance companies in tolerating loan delinquencies before

Because many of FSLIC’s assets were located in Texas and elsewhere
in the Southwest, FADA naturally focused its asset sales efforts in that
region of the country.

Utilizing the private sector

RTC is under a specific mandate to use private sector resources to the
extent “. . . practicable and efficient” (FHLBA, Sec. 21A(b)(II)(A)(ii)).
HOLC was not under such an explicit mandate; nonetheless, it did
make substantial use of private sector resources. FADA, of course,
represented an effort by the Federal Home Loan Bank Board to substi-
tute a private organization for a government agency.

Although RTC is almost one year old, it has let very few asset manage-
ment contracts even though FIRREA specifically mentions that RTC
should use “. . . real estate and loan portfolio asset managers, property
management, auction marketing, and brokerage services, if such
services are available in the private sector. . . ” (ibid.). The FDIC,
from whom most of RTC’s senior personnel have been drawn, has
traditionally employed private sector firms as well as contract employ-
ees to provide the services typically needed while holding assets for
sale. Thus, there is every expectation that RTC will do the same.

Tension could develop, however, between RTC and the private sector
over which will contract for and oversee the utilization of specific
services and which will make the strategic decisions about when a
specific asset will be sold, at what price, and what investment, if any,
RTC and/or a private sector party should make to prepare that prop-
erty for sale. Traditionally, the FDIC has retained these responsibili-
66   Bert Ely

ties for itself; yet, there are private sector firms that believe they are
capable of providing these general management and strategic planning
services on a fee basis.

HOLC used specific private sector services extensively, yet it also built
a very large staff to manage its properties, to oversee contracted activi-
ties, and to perform specific functions. HOLC employment peaked at
almost 21,000 at the end of 1934 (“Final Report,” 10). This coincided
with the middle of its authorized three-year period for refinancing
mortgages. By 1939, when its inventory of foreclosed properties topped
at 84,000 homes, HOLC still had 11,500 employees (“Final Report,” 10,

HOLC announced early in its life that it would contract extensively for
specific services, and apparently it did so. By 1937, it had used more
than 25,000 “fee personnel”; i.e., nonemployees, for appraisal, sales,
and legal activities. It also used private sector firms for building main-
tenance and repair work. Even so, HOLC often used full-time person-
nel, specifically appraisers, where local workloads justified it (Harriss,
44, 150).

Overall, it appears that HOLC contracted work to specific individuals
or small firms rather than to large organizations. Some functions
performed by HOLC personnel, most notably loan servicing, could have
been contracted out in their entirety to one or a few large organiza-
tions. Other functions could possibly have been contracted out more
than they were. The author has estimated that perhaps two-fifths of
HOLC’s personnel were employed in activities in 1938 and in 1941 that
could have been contracted to private sector organizations.10

Selling prices and the appraisal process

RTC is operating under a specific legislative mandate to dispose of
problem assets in a manner that will not depress local property values.
Specifically, it is not supposed to sell properties in distressed areas for
less than 95 percent of market value as determined by RTC’s Board of
Directors, unless RTC directors determine that the sale would further
certain objectives of RTC (FHLBA, Sec. 21A(b)(12)(D)(ii) and (E)),
specifically to obtain the maximum “net present value return from the
sale or other disposition of . . . assets . . .” from S&Ls sold by or under
the control of RTC (FHLBA, Sec. 21A(b)(3)C)(i)).

Although there are many fears that asset sales by RTC will depress
nearby property values, RTC has not yet sold a sufficient number of
assets to determine the effect of its pricing mandate or the degree to
                The Resolution Trust Corporation in Historical Perspective   67

which the fears of dumping will be realized. Two major banking
organizations, First Interstate and Texas Commerce, publicly ex-
pressed concern about the depressing effect of RTC property sales on
their own portfolios of nonperforming loans and real estate owned
(Klinkerman, 8). However, a Merrill Lynch report argued that RTC
asset dispositions will not ruin real estate markets, largely because the
markets have discounted for the likely RTC sales.11

Despite these concerns, RTC has announced a new price policy under
which it will discount up to 30 percent from the appraised value of a
property if that property does not sell within RTC’s specified timetable.
It is surmised that RTC’s new discounting policy reflects its rapidly
accumulating inventory of unsold properties. According to a fact sheet
(April 12, 1990) issued by the Oversight Board, the fair market value of
assets in RTC receiverships would increase from $7 billion as of April
12 to $39.5 billion once 141 targeted S&Ls are sold.

HOLC was not under a sales price mandate comparable to the 95
percent rule for RTC because HOLC’s primary mission was to refi-
nance homes, not to sell them. According to Harriss, however, “At a
very early date, it was established that [foreclosed] properties would be
sold as soon as reasonable terms could be obtained, that the [HOLC]
would not hold properties for speculative gain, nor dump them on the
market.” By 1940, when HOLC still had an inventory of over 60,000
houses, Congressional pressure built on HOLC to start selling proper-
ties more aggressively, especially in the New York City area. This
pressure probably increased the $337 million loss HOLC ultimately
suffered on its foreclosed properties, because 47 percent of that loss
occurred in New York and New Jersey. Losses in these two states as a
percentage of the original loan amount also were the highest in the
nation: 57 percent for New York and 53 percent for New Jersey
(Harriss, 113; 120-21).

HOLC tried to keep its losses to a minimum while holding houses for
sale through an aggressive rental program. In June 1939, HOLC had
more than 77,000 dwelling units rented on a month-to-month basis,
pending sale (Harriss, 105). It also appears that HOLC would delay
selling houses in markets where current selling prices were low rela-
tive to rental rates in the hope of obtaining a higher price. However, it
does not appear that the short-term rental of foreclosed houses was
beneficial to HOLC. Its net rental income offset just 8 percent of its
losses on foreclosure and equalled just 29 percent of the cost of repair-
ing and reconditioning these houses for resale (“Final Report,” Sched-
ule 14). Given that short-term tenants generally are hard, if not
abusive, on their quarters, HOLC’s net rental income may not even
have offset the money spent to repair the damage caused by tenants.
68   Bert Ely

FADA also was not under any minimum price mandates although
concerns were expressed that it was dumping assets. Essentially only
the Federal Home Loan Bank Board could impose any restraints on

Selling restrictions

RTC is restricted for 90 days in selling both single-family homes and
apartment houses, while HOLC and FADA did not operate under any
such restrictions. During the 90-day period, RTC can sell qualifying
housing only to low-income individuals and families and qualifying
multifamily housing to qualified purchasers (FHLBA, Sec. 21A(c)).12 It
is too soon to determine the benefits and detriments of these selling

Ethics and conflicts of interest

The differences between RTC and HOLC with regard to ethics and
conflicts of interest are dramatic. Salaried personnel of HOLC did not
even become fully integrated into the federal civil service until 1942
(Harriss, 149). In its early days, there was some politically influenced
hiring at HOLC, but that diminished with the passage of time. Hiring
fee personnel (independent contractors) was highly decentralized and
also may have been somewhat political. Real estate brokers retained to
manage rental properties could operate much as if the houses were
privately owned. For example, competitive bids were required only if
more than $50 was to be spent (approximately $600 in 1990 dollars),
but this requirement was frequently waived where swiftness was
desired or where there was slight prospect of getting more than one
bid. As Harriss observed, “In all matters HOLC was largely free from
the restraints generally associated with government operations; this
flexibility was a condition essential to the effective accomplishment of
its task.” (Harriss, 107)

RTC, and the FDIC as its exclusive manager, clearly is a federal
agency subject to all the requirements and constraints of any federal
agency (FHLBA, Sec. 21A(b)(1) and (2)). Section 501 of FIRREA is
replete with various provisions regarding conflicts of interest, auditing
and disclosure, solicitation and acceptance of offers, and the like that
collectively are directed at ensuring that RTC is operated in a scandal-
free and evenhanded manner. The impact of these provisions, how-
ever, on RTC’s efficiency cannot yet be determined.
                The Resolution Trust Corporation in Historical Perspective   69

As purposely designed, FADA experienced inordinate freedom from
these restrictions. Undoubtedly, this freedom contributed both to its
political problems and to the imposition of these restrictions on RTC.

Policy issues confronting RTC,
the Administration, and Congress

Although RTC is only one year old, numerous policy issues are surfac-
ing that eventually will demand the attention of the Administration
and Congress. The balance of this paper will frame some of the more
likely issues that will be addressed.

A disposition theory for insolvent S&Ls

Any type of government remedial action such as HOLC, FADA, or RTC
should be based on a theory of how the sale of distressed assets can be
accomplished at the lowest possible present value cost to the taxpayer.
As cited above, RTC’s charge clearly is to keep to a minimum the cost
to the taxpayer of solving the FSLIC problem.

The absence of a valid, comprehensive theory about how to proceed can
lead to organizational drift and ill-conceived strategic decisions. Ex-
pressed another way, an important element of the success of an opera-
tion like RTC is the clear and repeated articulation of the theory of how
it will achieve its goals. This articulation will provide critical guidance
to employees throughout the organization and will complement organi-
zation charts, business plans, and management directives.

HOLC does not appear to have had an explicit theory of how to conduct
itself although an ad hoc theory for selling foreclosed houses appears to
have evolved by the late 1930s. However, HOLC’s charge — refinance
homes and sell the foreclosures — was relatively simple compared to
the massive, complicated task facing RTC.

FADA’s basic theory seems to have been simply this: whatever FSLIC
does, a private sector firm can do more quickly and efficiently. That
theory, however, was a rationale for privatizing a portion of the FSLIC,
not a basis on which to operate.

An operational theory for RTC should have two components: the
disposal of S&L deposits and readily marketable assets and the dis-
posal of troubled, nonliquid assets, or, in effect, the damaged goods in
the insolvent S&Ls.
70   Bert Ely

The first segment of the theory, i.e., disposing of the S&L deposits and
readily marketable assets, must deal with these realities:

1. There is substantial overcapacity in the deposit-taking industry.
This overcapacity is evidenced by various measures, including deposits
on which above-market interest rates are paid; unprofitable branches;
redundant’executive offices and operations centers; and underem-
ployed loan originators. Therefore, that portion of the insolvent S&Ls
that represents excess capacity eventually will have to be liquidated,
either by RTC or by the bank, S&L, or other private sector party that
buys all or some portion of an insolvent S&L. Liquidations require
cash, especially when rate-sensitive deposits are discouraged by reduc-
ing interest rates to a then prevalent market rate. Thus, trimming
overcapacity means that buyers of insolvent S&Ls will be those firms
best positioned to liquidate the excess capacity in an S&L and that
RTC must supply adequate cash to fund the resulting deposit liquida-

2. The value of the deposit franchise of an insolvent S&L will quickly
diminish to almost zero because the S&L will steadily lose its service-
sensitive or core deposits. Thus it must replace these cheaper deposits
with more expensive rate-sensitive deposits.13

3. FIRREA significantly damaged the value of the S&L charter, in part
by imposing a Qualified Thrift Lender (QTL) test on S&Ls. This test is
not imposed on commercial banks, although S&Ls will be forced over
the next four years to conform largely to the restrictions and capital
standards now imposed on banks. The QTL test will require S&Ls to
hold a greater portion of their assets in lower yielding, housing-related
assets than banks. This requirement will impair the return on equity
capital invested in S&Ls. Thus, the QTL test, coupled with the bank-
S&L regulatory harmonization mandated by FIRREA, will force more
and more solvent S&Ls to sell out to banks over the next few years.
This will create a buyers’ market that will reduce further the premium
that can be obtained when selling the deposit franchise of an insolvent

4. Readily marketable assets are only those securities that can be sold
fairly quickly in a national marketplace, i.e., mortgage-backed or
government securities or easily movable assets, such as cars and boats;
or high-quality real estate that can be sold in a reasonable time frame
in a strong, not overbuilt, real estate market.

The fact sheet the Oversight Board issued on April 12 effectively
acknowledged these realities.
                  The Resolution Trust Corporation in Historical Perspective   71

The second part of the theory, the disposal of troubled, nonliquid real
estate must deal with these realities:

1. Problem real estate falls into essentially two categories. The first is
high-quality real estate located in a market where there is an excess or
overhang of that particular type of real estate. For example, a market
may have an excess of suburban office space but a reasonable supply of
single-family housing. Depressed prices for office buildings will have
little, if any, effect on housing prices in that market and no easily
measured effect on office building prices in other cities. This overhang
will disappear only through growth and demolition. Thus, current
prices for overbuilt real estate will represent the marketplace’s present
value assessment of when the overbuilt condition will disappear.

This assessment can be skewed, though, if a government agency owns
or effectively controls a portion of the overhang. Private sector partici-
pants in that market will forecast a delayed and uneven price recovery
because they fear that at some point the government agency might
dump its share of the overhang for economically illogical reasons.
HOLC’s dumping of its foreclosed housing in the New York City area in
1943 and 1944 is a classic example of how this fear can become reality
(Harriss, 124). More recently, in May 1989, Federal Home Loan Bank
Board (FHLBB) Chairman M. Danny Wall excoriated the owners of
S&Ls sold by FHLBB in the latter half of 1988 for not selling their
problem real estate more quickly, even though the Bank Board had
given these S&Ls very generous subsidies for eight to ten years to
encourage them to retain their problem assets rather than dump them
into the market. Mr. Wall’s speech, coming less than a year after the
subsidy awards, understandably sent very mixed signals to private
sector participants in Texas real estate markets.

The second, more serious type of problem real estate is junk real estate
which consists of half-built, vandalized, badly located, and/or poorly
designed real estate whose salability often is worsened further by
various legal impediments that may cloud the title. Unfortunately,
most of the real estate owned by or securing the loans and investments
of insolvent S&Ls is junk real estate, which can exist anywhere, even
in the strongest real estate markets.

The current market value of junk real estate largely reflects the prob-
lems inherent in that particular piece of property. Being located in an
overbuilt market will depress further the current value of junk real
estate. Thus the current value of junk real estate will reflect three
discounts: the cost of removing its legal impediments, the cost of restor-
ing the property to its most valuable use, and a discount for the time it
will take the overbuilt condition to disappear. Unfortunately for RTC,
72   Bert Ely

most junk real estate owned by insolvent S&Ls is located in overbuilt

2. Private ownership of a market overhang is preferable to government
ownership because market prices are likely to recover more quickly for
the reasons cited above. Private ownership of troubled real estate is
also desirable for another reason: eliminating the problems and thus
restoring value to troubled real estate requires two factors much more
likely to be found in the private sector — entrepreneurial talent and
risk capital.

Restoring troubled real estate to a readily marketable condition re-
quires above-average and especially creative real estate restoration
capabilities and experience not found in government bureaucracies.
This skill is entrepreneurial because it requires bold risk-taking and
often the ability to find imaginative new uses for the troubled property.
This ability is closely akin to the proverbial turning of the sow’s ear
into a silk purse.

The restoration of troubled real estate to its maximum net present
value also requires substantial capital investment, usually many times
the cost of purchasing the troubled property. Substantial investment is
needed for two reasons. First, money has to be spent to obtain clear
title to a property before restoration and redevelopment work can
proceed. This process can involve several years of litigation and often
the expenditure of substantial sums to settle claims and to buy out
other interests in the property. Only after clear title is obtained can
money be invested to restore the property to its highest net present
value. This type of property restoration requires a substantial equity
capital investment because it is not possible to leverage high-equity
investments in these high-risk projects. Much of this risk is timing
risk, i.e., when will market conditions permit the sale of the restored
property at a price that will provide a good return to its investors.

Because of the substantial equity investment and capable entrepre-
neurial talent that these problem properties require and the high risks
they entail, a troubled property located today in an overbuilt market
can easily be worth less than 5 percent of its possible selling price five
years hence.14 As low as this estimate may seem, if this type of prop-
erty is held by RTC and receives only passive, custodial care, in five
years RTC quite likely will sell it for an amount that has a present
value today less than the price for which RTC can sell the property.

Strange as it may seem, RTC may even have to pay someone to assume
ownership of the land underlying a property which RTC owns or in
which it has an ownership interest. The reason is that incomplete or
                 The Resolution Trust Corporation in Historical Perspective   73

damaged real estate, like any type of damaged goods, is highly perish-
able. In five years any improvements still standing on the property
may have deteriorated so badly or become so obsolete that it will be
more effective to bulldoze these improvements and start all over again.
In some situations, particularly where environmental problems are
present, the cost of bulldozing and restoring the land to a saleable
condition will be more than the price for which the land will sell.

3. RTC’s carrying cost for problem assets, particularly junk real estate
located in overbuilt markets, is quite high, probably higher than the
carrying cost of private sector parties. The components of this carrying
cost are (a) the pure funding cost, i.e., the interest rate on deposits and
borrowings used to fund the S&L’s assets plus the cost of raising those
deposits; (b) the operating losses or cash outflows incurred by a specific
asset; (c) the rate at which the asset in question is deteriorating physi-
cally or otherwise losing market value; and (d) the burden on the
recovery of property values in the local marketplace because of govern-
ment ownership or control over a material portion of the real estate
overhang in that marketplace. This interest rate should be the dis-
count rate used to determine the current value of an asset expected to
bring a certain amount at some future date.

RTC’s carrying cost will often be higher because a substantial portion
of this cost represents asset deterioration. Generally, private sector
parties are more effective at keeping this deterioration to a minimum
because they have superior entrepreneurial talent; they are more
willing to invest the fresh capital needed to arrest and even reverse the
deterioration; and they are free of the ethical constraints that hobble
RTC. Thus, losses in insolvent S&Ls controlled by RTC effectively
compound at a very high rate of interest. Because of accounting short-
comings in insolvent S&Ls, this rate is much greater than is evident in
S&L financial statements.

An example will illustrate the effect of a higher discount rate for RTC:
if RTC’s discount rate for a particular piece of property is determined to
be 20 percent annually and RTC believes that the property might be
worth $1 million in five years, then that piece of property today is
worth $400,000 to RTC even though it might be worth more to a
private sector party. The property would be worth more to the private
sector party because this party could discount the property’s antici-
pated future value at a lower discount rate than the 20 percent rate
used by RTC. Using a high, yet realistic, discount rate to assess RTC’s
circumstances will encourage it to sell problem assets today, in an as-is
condition, rather than to speculate on property value recoveries that
may never develop so long as RTC is a substantial property owner in
that market.
74   Bert Ely

4. Parcel-by-parcel sales of distressed real estate are feasible only
when relatively limited quantities are involved. However, when vast
quantities of problem or surplus assets must be “moved out” the door,
some portion of these goods must be sold in bulk to the lowest bidder.
In one sense, the task facing RTC is comparable to selling surplus
military equipment after World War II. As stated above, RTC is
starting with an inventory of 35,000 parcels to sell; potentially, it may
have to sell as many as 270,000 or more. Particularly because these
parcels are concentrated in the Southwest, RTC will not be able to
recover the maximum present value of these parcels if it takes years or
a decade to sell them. This is particularly the case with highly perish-
able distressed real estate. Thus a worthwhile theory for disposing of
vast quantities of problem real estate must incorporate a bulk sales
strategy. However, it is beyond the scope of this paper to suggest such
a strategy.

Funding adequacy and the cost of delay

For the numerous reasons cited above, delayed resolution of the prob-
lem of insolvent S&Ls has been quite costly to RTC and therefore to
the American taxpayer. On average, losses in insolvent S&Ls com-
pound 20 to 25 percent annually.15 This percentage is roughly triple
the interest rate at which the federal government can currently borrow
on a full-faith-and-credit basis. In effect, delayed resolution of the
insolvent S&Ls problem represents a very expensive way to fund the
public warehousing of these institutions.

There are two components to the funding issue. The first, is working
capital for RTC to bridge the period between the time it disposes of the
deposits and other liabilities of an insolvent S&L and the time it
recovers a portion of its initial outlay by selling the retained assets of
that S&L. The second is funding beyond the $50 billion already autho-
rized for RTC to cover net insolvency losses that almost certainly will
be incurred by the time it completes its assigned mission.

Organizational issues

FIRREA effectively divided the FSLIC cleanup process by creating
both RTC and the Oversight Board. RTC, which was grafted onto
FDIC, was given the operating responsibility for disposing of insolvent
S&Ls. The Oversight Board was given the responsibility both for
developing a strategic plan for RTC as well as for evaluating RTC’s
performance under the plan. This split responsibility has created a
                The Resolution Trust Corporation in Historical Perspective   75

structure in which neither agency can be held totally accountable for
the success or failure of the FSLIC cleanup effort.

This structuring will not be a problem if the FSLIC cleanup is deemed
successful by all concerned as it proceeds; however, it will be a very
serious problem if the FSLIC cleanup stumbles along the way. In such
a case, RTC could claim, perhaps with some justification, that it had to
follow an unwise strategy promulgated by the Oversight Board or that
second-guessing by the Oversight Board had slowed RTC down unnec-
essarily. On the other hand, the Oversight Board, perhaps with some
justification, could claim that RTC had not properly executed the
strategy that the Oversight Board had developed or that RTC had
failed at some relatively straightforward tasks assigned to it.

The split of responsibility between RTC and the Oversight Board is in
marked contrast to the organizational arrangement for HOLC.
Throughout its existence, HOLC operated as a fairly autonomous
entity. From 1933 to 1942, HOLC was directed by a general manager
who reported to a board of directors comprised of the five members of
the Home Loan Bank Board (“Final Report,” 6). This structure closely
parallels RTC structure where the chief executive of RTC reports to a
board of directors composed of the five directors of the FDIC. However,
HOLC did not have a second board, comparable to the Oversight
Board, to oversee its activities. In 1942 and again in 1947, the organi-
zational arrangements of HOLC were reshuffled, but the essence of its
structure did not change.

Although the Federal Home Loan Bank Board created FADA, FADA
had its own board of directors, elected by the Bank Board, to whom
FADA’s chief executive reported. Thus, FADA’s chief executive was
one level removed from the oversight of a board of presidential appoin-
tees. This distancing of FADA from legitimate political oversight
probably contributed to the political difficulties that led to its demise
long before it had completed its assigned tasks.

There is a key distinction between HOLC and RTC that may provide a
rationalization for having the Oversight Board: HOLC did not explic-
itly spend any taxpayer monies, while RTC is already scheduled to
spend about $46 billion of taxpayer monies. RTC received a direct
grant of $18.8 billion from the U.S. Treasury. In addition, about $27
billion in interest (present value) will be paid from taxpayer funds over
the next 30 years on the $30 billion of bonds to be issued by REFCORP.
Secretary Brady’s recent testimony suggests that eventually far more
will be spent to clean up the FSLIC problem. The Reconstruction
Finance Corporation (RFC) capitalized HOLC with $200 million, all of
which was eventually repaid along with a modest dividend. In addi-
76   Bert Ely

tion, HOLC was allowed to borrow funds with what amounted to the
full-faith-and-credit backing of the United States. HOLC also benefited
from indirect tax and cost subsidies; nonetheless, it did not directly
expend taxpayer funds.

The presumed rationale for the split of responsibilities between RTC
and the Oversight Board is the fact that the FDIC, an independent
agency of the federal government, was designated in FIRREA as the
exclusive manager of RTC (FHLBA, Sec. 21A(b)(1)(C)). In effect, the
federal government contracted with the FDIC, which previously had
been funded solely by its own revenues, to manage RTC, which will
largely be funded by taxpayer monies. Thus the Oversight Board was
created to supervise this contractual relationship.

This rationale is an interesting fiction, and it supports a very inefficient
organizational structure. The time may be rapidly approaching when
the Administration and Congress will consider merging RTC and the
Oversight Board into one agency, under one executive, that is inte-
grated into the executive branch of the federal government and thus
detached from the FDIC. This, of course, is the organizational arrange-
ment of all of the major agencies that spend taxpayer monies. This
management structure also would more closely parallel the structure of
the old HOLC by eliminating the split responsibility between RTC and
the Oversight Board.

Conflicts of interest and ethical concerns

Government agencies, even relatively independent ones, must be
publicly accountable for any taxpayer monies they spend. Therefore,
concerns about conflicts of interest and ethical practices are valid.
However, the pursuit of conflict-free transactions and high ethical
standards can impede efficiency, particularly if those concerns are
addressed through regulatory prohibitions rather than open, competi-
tive bidding practices that squeeze out the inefficiencies and waste
caused by conflicts of interest and unethical practices.

Expressed another way, there are two ways to ensure ethical practices
while simultaneously keeping taxpayer costs to a minimum in a gov-
ernment activity. One way, which focuses on process, is through a
maze of laws and regulations that deter all but the naive and the
incompetent from even attempting to do business with a government
agency. The other way, which focuses on results, is through operating
practices that encourage maximum competition to secure the business
of the agency. The agency obtains quality services at the lowest pos-
sible cost and sells what it has available at the highest possible price.
                    The Resolution Trust Corporation in Historical Perspective          77

The thrust of FIRREA reflected the process orientation of most govern-
ment laws and regulations; however, RTC and the taxpayer might be
better served if there were less emphasis on possible conflicts of inter-
est and ethical violations, per se, and more on the results obtained,
which in the case of RTC means keeping the taxpayer cost to a mini-
mum in the FSLIC bailout. In effect, a direct emphasis on reducing
conflicts of interest and ethical problems may add billions of dollars to
the cost of the FSLIC cleanup. However, a direct emphasis on maxi-
mum competition to reduce costs to a minimum should deliver a bonus
— few conflicts of interest and a high level of ethical practices. This
result would parallel the centuries-old experience of the marketplace:
efficient markets have no tolerance for conflicts of interest and unethi-
cal practices that can only add to the inefficiency of the marketplace.


In the months since its creation, questions and doubts about the capac-
ity of RTC to manage effectively its massive assignment have started
to surface. The drumbeat is almost certain to grow louder in the
coming months. As the structure, funding, and strategies of RTC and
the Oversight Board are reexamined, it is important that relevant
historical experiences, including those of HOLC and FADA, be consid-
ered. It is hoped that this paper will serve that purpose.


Mr. Bert Ely is a financial institutions consultant. He is the principal in Ely &
Company, Inc., in Alexandria, Virginia.

1.   Home Loan Bank Board, “Final Report to the Congress of the United States
     Relating to the Home Owners’ Loan Corporation” (Washington, DC: March 1,
     1952) (hereafter cited as “Final Report”). At that time it was simply called the
     Home Loan Bank Board. The word “Federal” was added later.

2.    C. Lowell Harriss, Histories and Policies of the Home Owners’ Loan Corporation
     (New York: National Bureau of Economic Research, 1951), 7.

3.   Business Week, March 27, 1989, 104. Harriss, table 17, p. 60.

4.   Lamar Kelly, head, RTC asset disposition (Speech delivered to the National
     Association of Legislative Fiscal Officers, Washington, DC, December 13, 1989).

5.   Author’s estimate: $80 billion in problem assets minus $25 billion of owned
     assets in 703 S&Ls already liquidated or sold, currently in RTC conservatorship
     program, or not yet under RTC control.
78     Bert Ely

6.   According to one estimate, only 5 percent of FADA’s total dispositions consisted of
     restructured loans. Savings Institutions, November 1988, 66.

7.   See Steve Klinkerman, “RTC Gets Stung as NCNB Texas Spurns S&L Assets,”
     American Banker, November 20, 1989, 1. When NCNB Texas National Bank, for
     example, acquired University Savings Association in October 1989 from RTC,
     NCNB purchased only 15 percent of $2.5 billion of University’s assets and took
     RTC cash for the rest. In more recent sales of insolvent S&Ls, buyers have
     acquired relatively few of the assets of these S&Ls.

8. Federal Home Loan Bank Act, 12 U.S.C., Sec. 1421, as amended by Financial
   Institutions Reform, Recovery, and Enforcement Act of 1989, Public Law 101–73,
   Sec. 501 (a), 103 Stat. 363-369, in 1989 U.S. Code Cong. & Admin. News, 183
   (hereafter cited as FHLBA).

9. HOLC data from Harriss, table 19, p. 75. Population data from U. S. Bureau of
   the Census, Historical Statistics of the United States, Colonial Times to 1970,
   Series A-7, A-195, (Washington, DC, 1975).

10. Estimate based on Harriss, tables 39 and 40, pp. 146-7.

11. Leonard Sahling and Elizabeth Lavin, “Will RTC Asset Dispositions Ruin the
    Real Estate Markets?” (New York: Merrill Lynch Capital Markets Group,
    November 1989).

12. The disposition of “eligible residential properties” accounts for about 20 percent of
    the legislative language creating the RTC.

13. Based on unpublished studies conducted by the author.

14. Based on a confidential analysis the author has prepared.

15. This percentage includes the cost of funding the negative net worth of the S&L;
    the deterioration in the franchise value of its deposit base; and the deterioration
    of its remaining assets under the passive, custodial care of RTC or its contractors.
    The author has previously derived this percentage in two different ways: first,
    this is the approximate rate at which the author’s estimate of FSLIC’s aggregate
    insolvency loss compounded from the end of 1985 to the end of 1988; second, this
    is the author’s calculation of the buildup of losses in several insolvent S&Ls.

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