What Is Resolution Trust Corporation?
The Resolution Trust Corporation (RTC) was a temporary U.S. government agency established to manage and liquidate the assets of failed savings and loan associations (S&Ls) during the thrift crisis of the late 1980s and early 1990s. Operating as a critical component of financial regulation and a specialized type of government intervention, the Resolution Trust Corporation's primary mission was to stabilize the financial system by disposing of distressed assets, primarily real estate and mortgage loans, inherited from insolvent institutions. This complex task involved extensive asset management and a structured approach to prevent further disruption to the real estate and financial markets.
History and Origin
The Resolution Trust Corporation was born out of the profound financial crisis of the savings and loan industry. Beginning in the late 1970s and escalating through the 1980s, high interest rates, coupled with deregulation that allowed thrifts to engage in riskier investments, led to widespread insolvency among these institutions. Many S&Ls were burdened with long-term, fixed-rate mortgages that earned less than the interest they had to pay on deposits, leading to significant losses.15 The existing federal insurer, the Federal Savings and Loan Insurance Corporation (FSLIC), became insolvent itself due to the overwhelming number of bank failures.14
In response to this escalating crisis, Congress passed the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) on August 9, 1989.13 FIRREA abolished the FSLIC and created the Resolution Trust Corporation as a temporary entity with the mandate to resolve hundreds of insolvent thrifts.12,11 The RTC was tasked not only with closing these institutions but also with efficiently disposing of their vast portfolios of toxic assets to minimize losses to taxpayers and restore public confidence in the financial system.10
Key Takeaways
- The Resolution Trust Corporation (RTC) was a temporary U.S. government agency created in 1989 to address the savings and loan crisis.
- Its primary role was to manage and liquidate the assets of hundreds of failed S&Ls, aiming to maximize asset recovery and minimize taxpayer losses.
- The RTC played a crucial role in stabilizing the U.S. financial system during a period of significant distress.
- The agency resolved 747 thrifts and disposed of hundreds of billions of dollars in assets during its operational period from 1989 to 1995.9
- Upon its termination in 1995, the remaining assets and responsibilities of the Resolution Trust Corporation were transferred to the Federal Deposit Insurance Corporation (FDIC).8
Interpreting the Resolution Trust Corporation
The existence and operations of the Resolution Trust Corporation are interpreted as a significant chapter in U.S. financial stability and the history of government intervention in financial markets. The sheer scale of assets managed by the RTC—hundreds of billions of dollars—underscores the severity of the savings and loan crisis and the magnitude of the government's response. The RTC's performance is often evaluated by its recovery ratio (the percentage of asset value recovered through sales) and its ability to conduct liquidations without unduly disrupting financial markets. Its methods, including the use of bulk sales and partnerships with the private sector, became a model for future distressed asset dispositions, though not without their own set of challenges.
Hypothetical Example
Imagine a period in a hypothetical economy where several regional "Housing & Loan Associations" (HLAs), which primarily offered home mortgages and took deposits, begin to fail due to a combination of falling property values and ill-advised high-risk loans. Their balance sheets are filled with non-performing mortgages and depreciated real estate.
To prevent a cascading failure across the financial system, the government establishes a "National Asset Resolution Agency" (NARA), akin to the Resolution Trust Corporation. When an HLA is declared insolvent, NARA steps in. It takes over the HLA's assets, which include a portfolio of foreclosed homes, commercial properties, and loan obligations. NARA's goal is to sell these assets in an orderly fashion. For instance, it might bundle hundreds of foreclosed homes into a single package and auction it off to a large institutional investor at a discounted price, thereby quickly returning the properties to the market while recovering some value. Similarly, commercial properties might be sold through managed sales to developers. This process aims to liquidate the assets as efficiently as possible, minimizing further market disruption and recouping funds to cover the costs of the deposit insurance payouts.
Practical Applications
The Resolution Trust Corporation's operational model and lessons learned have several practical applications in the realm of financial regulation and crisis management:
- Distressed Asset Management: The RTC pioneered strategies for the rapid disposition of large volumes of distressed real estate assets and non-performing loans. These methods, including securitization and the formation of public-private partnerships, have influenced subsequent approaches to managing asset write-downs in later financial crises.
- Regulatory Response: The creation of the RTC demonstrates a large-scale, coordinated governmental response to a systemic financial threat, highlighting the necessity of adaptable regulatory frameworks and robust mechanisms for resolving failed financial institutions.
- Preventing Market Contagion: By taking troubled assets off the books of failed institutions and managing their sale, the Resolution Trust Corporation helped prevent further erosion of asset values and limited the potential for broader economic contagion, particularly in the real estate sector.
##7 Limitations and Criticisms
Despite its crucial role in resolving the savings and loan crisis, the Resolution Trust Corporation faced its share of limitations and criticisms. A primary concern revolved around the significant cost to taxpayers, with estimates of direct and indirect government costs totaling up to $150 billion. Cri6tics often pointed to the speed at which the RTC sometimes liquidated assets, arguing that selling large volumes quickly, even at a discount, might have depressed asset values further than necessary, potentially leading to lower recovery rates in some instances.
There were also concerns regarding the RTC's internal controls and contracting procedures, which were highlighted in reports by the Government Accountability Office (GAO)., These reports detailed weaknesses in oversight and potential for problematic contracting, underscoring the challenges of managing such a massive undertaking. Furthermore, some economists have argued that the very existence of government-backed bailouts, like the one managed by the Resolution Trust Corporation, can contribute to moral hazard by creating an expectation that large financial institutions will be rescued if they face severe distress, potentially encouraging riskier behavior.
Resolution Trust Corporation vs. Federal Deposit Insurance Corporation
While both the Resolution Trust Corporation (RTC) and the Federal Deposit Insurance Corporation (FDIC) are U.S. government agencies involved in maintaining financial stability and resolving failed financial institutions, they had distinct mandates and operational contexts.
The Resolution Trust Corporation was a temporary agency created specifically to handle the resolution of failed savings and loan associations from the S&L crisis (1989-1995). Its focus was on liquidating the vast, often complex, portfolios of real estate and other assets acquired from these insolvent thrifts. Its mission was finite and tied directly to the clean-up of a particular systemic crisis.
In contrast, the Federal Deposit Insurance Corporation is a permanent, ongoing independent agency of the U.S. government that provides deposit insurance to depositors in U.S. commercial banks and savings institutions. The FDIC's primary responsibility is to maintain stability and public confidence in the nation's financial system. It manages the Deposit Insurance Fund, examines and supervises financial institutions for safety and soundness, and resolves failed banks and thrifts (including taking over the RTC's remaining duties after 1995). While the FDIC also liquidates assets, its operations are continuous and cover a broader range of institution failures, not limited to a specific crisis era. The FDIC's role often involves finding acquirers for failed institutions to preserve banking services and minimize disruptions.
FAQs
When was the Resolution Trust Corporation active?
The Resolution Trust Corporation was established in August 1989 and completed its primary mission by the end of 1995, at which point its remaining functions were transferred to the Federal Deposit Insurance Corporation.,
#5## Why was the Resolution Trust Corporation created?
The Resolution Trust Corporation was created in response to the massive savings and loan crisis of the 1980s, which saw hundreds of S&Ls become insolvent, threatening the stability of the U.S. financial system. It was designed to manage and dispose of the assets of these failed institutions.
##4# What kind of assets did the Resolution Trust Corporation manage?
The RTC primarily managed real estate-related assets, including commercial and residential properties, raw land, and mortgage loans, which were acquired from the portfolios of failed savings and loan associations.
##3# Was the Resolution Trust Corporation successful?
The Resolution Trust Corporation is generally considered successful in its mission of stabilizing the financial system and liquidating a vast amount of distressed assets. It closed 747 thrifts and recovered approximately 85% of the value of the assets it seized, although the total undertaking involved significant taxpayer costs.,
#2## What happened to the Resolution Trust Corporation after it completed its mission?
After completing its operational mission, the Resolution Trust Corporation was terminated on December 31, 1995. Its remaining assets, liabilities, and duties were subsequently transferred to the Federal Deposit Insurance Corporation (FDIC).,1