811 transition what to do with the 17 trillion

Info icon This preview shows pages 107–109. Sign up to view the full content.

View Full Document Right Arrow Icon
8.1.1 Transition What to do with the $1.7 trillion portfolio of assets? We envision that the government could slowly wind down the assets on the GSEs’ balance sheets -- for example, by corralling them into a “GSE Resolution Trust Corporation” (GSE RTC). A similar structure was established
Image of page 107

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
106 during the savings and loan (S&L) crisis in the late 1980s and early 1990s in the United States and during banking crises in other countries (e.g., Sweden in the early 1990s). Specifically, the Resolution Trust Corporation (RTC) was set up after the S&L crisis in 1989 with the intention of being a “bad bank” (technically a United States government-owned asset management company). It took over the loss-ridden assets (which included commercial properties, commercial mortgages, and residential mortgages) of troubled S&Ls and was charged with the business of liquidating these assets. In six years, the RTC closed or otherwise resolved 747 thrifts with total assets of $394 billion. In 1995 its duties were transferred to the reformed and empowered Federal Deposit Insurance Corporation (FDIC). The RTC pioneered the use of so-called “equity partnerships” to help liquidate the real estate and financial assets that it inherited from insolvent thrift institutions. While a number of different structures were used, all of the equity partnerships involved a private sector partner’s acquiring a partial interest in a pool of assets, controlling the management and sale of the assets in the pool, and making distributions to the RTC reflective of the RTC’s retained interest. Although the prices that the RTC received on its initial “bulk sales” were often considered disappointing, the RTC did much better in the partnerships. It kept some of the upside through a retained interest and through the partnerships benefited from expertise of private liquidators and asset administrators that it would have otherwise struggled to put together or acquire. All in all, the RTC represents exactly the kind of bad bank that should be set up at the end of a crisis. It was a boring public utility in the sense that its only task was to liquidate real- estate related assets; its clarity of function and focus facilitated innovative methods that did not simply retain the risk of bad assets it took on but in fact involved the private sector in facilitating liquidations; and it eventually died (was wound down and dissolved) leaving no footprints of a government entity into the indefinite future. We envision the GSE RTC formalizing the current role of the GSEs as a “bad bank”. The main task of the GSE RTC would be to wind down the $1.7 trillion dollar mortgage portfolio. Given the size of the portfolio, the approach will have to be gradual lest it destabilizes MBS prices (the fire sale argument of Chapter 4), and ultimately mortgage rates in the primary mortgage market.
Image of page 108
Image of page 109
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern