Resolution Trust Corporation, Take Two?
The time is the late eighties. A Republican administration was coming to an end of eight years in office. In the financial sector, destruction was reigning down as the fruits of gleeful greed from the previous years’ deregulation turned out to be less than sweet.
Fast forward 20 years. It’s like we’re in almost exactly the same place.
In the late eighties, the government formed the Resolution Trust Corporation in an effort to buy all the assets from the savings and loans mess and prop up the economy. Now, as one would expect — since history is repeating itself, the government is considering this option again. The news has many hopeful that the government will not leave them to languish in the depths of despair, reaping the rewards of their greed-inspired über-risks.
A new structure wouldn’t actually look just like the RTC, but the sentiment behind it is the same. The Wall Street Journal speculates on what a new structure could look like in these modern times:
Any eventual plan isn’t expected to mirror the Resolution Trust Corp., which was created during the savings and loan crisis to hold and sell off the assets of failed banks. Rather, a new entity might purchase assets at a steep discount from solvent financial institutions and then eventually sell them back into the market.
But will an incarnation of the Resolution Trust Corporation really be as helpful this time around?
Most of what was put into the RTC were actual properties. The government could then sell them off. Now, though, things are a little different. Instead of tangible real estate that might appreciate in value, many of the “assets” that the government is thinking about buying are actually bonds backed by foreclosed properties. This changes things.
Of course, chances are that the move will stabilize the U.S. (and world) financial markets. But it may not actually help in terms of addressing the root causes of the problem. Instead, investors and others are getting a very clear message that risk that they take on will be socialized and spread out for everyone to help absorb. The other problem is that current measures will do nothing to prevent this sort of thing from happening again.
What do you think? Do you think its a good idea for the government to buy bad assets?
Tags: Resolution Trust Corporation, stock market, home mortgage loan, mortgage lenders
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