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811 transition what to do with the 17 trillion

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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
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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.
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