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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.
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.
Housing Policy Debate • Volume 1, Issue 1 53 The Resolution Trust Corporation in Historical Perspective Bert Ely Ely & Company, Inc. Abstract 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- dations. Introduction 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 (FSLIC). 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. Size 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, 1990. 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 56 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        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 Funding 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 assets. 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- 1991. 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 Geography 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 S&Ls. 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- structed. 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 foreclosing. 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, 26). 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 FADA. 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 restrictions. 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- tions. 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 S&L. 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 markets. 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. Conclusion 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. Author Mr. Bert Ely is a financial institutions consultant. He is the principal in Ely & Company, Inc., in Alexandria, Virginia. Endnotes 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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