US Resolution Trust Corporation

FIRREA created the Resolution Trust Corporation and abolished the Federal Home Loan Bank Board and Federal Savings and Loan Insurance Corporation, while transferring the remaining duties of managing the FSLIC’s affairs to the FDIC-run FSLIC Resolution Fund (US Congress 1989, sec. 501). The Office of Thrift Supervision supervised privately held thrifts and closed them when they became insolvent. The RTC coordinated with the OTS at the point of failure to ensure a smooth transition. Any responsibilities for managing failed thrifts then fell on the RTC. The FDIC became responsible for failures once the RTC’s responsibilities ended.

Title V, Section 501, of FIRREA established the RTC and its Oversight Board, as well. It stated specifically that the duties of the RTC were to “manage and resolve” depository institutions that were insured and had been placed into conservatorship by the FSLIC from January 1, 1989, to August 9, 1989. Additionally, it gave the RTC resolution authority over any S&Ls that would become insolvent in the three-year period following August 9, 1989 (US Congress 1989, sec. 501).

In FIRREA, Congress gave the RTC several mandates that often conflicted with one another. The RTC was required to:

1. Maximize the net present value (NPV) of the return on any asset disposition efforts or sales.
2. Minimize the impact that these disposition efforts would have on local real estate and financial markets.
3. Maximize both the “preservation and affordability of residential real property for low and moderate-income individuals” (US Congress 1989, sec. 501).

These mandates could conflict. For instance, the first objective might involve the sale of as many assets as possible, as quickly as possible, to ensure the highest rate of return. In doing so, however, this could be considered “dumping” and potentially impact local real estate and financial markets. Additionally, compliance with the affordable housing mandate could involve reserving certain portions of the asset portfolio for lower-income buyers, which could increase costs to the RTC (FDIC 1998). FIRREA and RTCRRIA gave the RTC mandates to include MWOBs in their contracting agreements and established an Office of Minority and Women Outreach and Contracting Program. In 1992, for instance, MWOBs received approximately $323 million, or 28%, of total fees, which was close to the 30% target that RTC had set (GAO 1993b, 3).

Much of the RTC’s early history was fraught with severe political backlash, primarily due to the speed of its cleanup and the allocation of its funds. Representatives Frank Annunzio (D-IL) and Carroll Hubbard (R-KY) were two of the program’s earliest detractors. Representative Annunzio went on record saying, “The American people are disgusted with the lack of progress of the savings and loan cleanup. Every constituent is deeply frustrated with the slow pace of the RTC and the Justice Department.” He also railed against the company’s extensive use of put options, which provided acquirers a “free ride period” (RTC Task Force 1990b).

Representative Hubbard echoed this sentiment, stating that “support for this operation is gone” and that the corporation “cannot get another dollar of public funds for this operation until the taxpayers’ interests come first . . .” (RTC Task Force 1990b).

Both of these accounts, as well as those of others on the House Committee on Banking, Finance, and Urban Affairs, signified a dwindling pool of public support, if not one that had already completely evaporated so soon into the program’s lifespan.

In this same 1990 congressional session, then–Chairman of the Oversight Board Nicholas Brady, the Treasury secretary, explained that the government’s primary goal when creating the RTC, first and foremost, had been to protect depositors. Brady addressed the claim of being too lenient on thrifts: “We are not bailing out shareholders of S&Ls, we are not bailing out management, we are not in this to preserve the institutions; in fact, many will be lost. [Money] spent [is] spent to protect depositors” (RTC Task Force 1990b). Much of his communication to the committee was that the problems facing the industry were much more widespread than previously thought and that the RTC wasn’t in the business of speculating on future losses. He did say that, based on the current economic climate, losses were likely to range from $90 billion to $130 billion, which ultimately was slightly more than what the RTC ended up sustaining. Brady ended his statement by reaffirming the RTC’s original commitment made by President Bush, to “protect depositors, clean up the industry at the least cost to the taxpayers, and punish the criminals” (RTC Task Force 1990b).

The philosophy of “depositors first,” according to RTC resolution data, showed up in the composition of the corporation’s resolution strategies throughout its lifespan. Early on, the RTC opted to engage in more rapid resolution methods via straight deposit payoffs and insured deposit transfers for many of the thrifts that had been in conservatorship prior to FIRREA. Using these tools, depositors who had been in limbo were made whole much more quickly than if the RTC had used the marketing and solicitation tactics necessary to complete a purchase and assumption transaction, despite their usually resulting in lower costs (FDIC 1998).

William Seidman, then–chairman of the RTC, reinforced the ideas in Brady’s testimony with his own about two years later. Seidman explained that, of the 646 institutions that the RTC had become responsible for, it had closed 511, and approximately 16 million depositors, with average balances of about $9,000, had been protected. In his rundown on the program’s operations, Seidman also talked about the RTC being, “committed to a philosophy of openness and public accountability” (RTC Task Force 1992). To this end, Seidman cited (1) the establishment of a “Public Reading Room,” which synthesized more than 29,000 inquiries from the RTC’s creation through July of 1991, and (2) the creation of regional “Public Service Centers,” which processed about 20,000 inquiries in the same time period (RTC Task Force 1992).

Because the Oversight Board and RTC executives were required to regularly meet with members of Congress, these publicly available testimonies and discussions made up a substantial part of the RTC’s communications efforts.^FNThe RTC also faced a substantial amount of criticism from the General Accounting Office (GAO), now the Government Accountability Office, during its early years. The specifics, as well as the RTC’s subsequent efforts to address them, are outlined in the “Evaluation” section.

Under the original legislation, the FDIC acted as the day-to-day manager of the RTC and the RTC’s board of directors was identical to the FDIC’s. The RTC was responsible for any administrative costs (US Congress 1989, sec. 501). This structure was created because the FDIC did not want to “shoulder the burden of conducting the S&L cleanup without having any say in how the cleanup would be run” (Davison 2005). While the Bush administration did not like the idea of ceding further control of the RTC to the FDIC, they recognized that sharing responsibility with the FDIC would provide it some insulation in case the RTC ran into problems (Davison 2005).

The members of the Oversight Board consisted of the following:

1. The secretary of the Treasury;
2. The chairman of the Federal Reserve Board of Governors;
3. The secretary of Housing and Urban Development; and
4. Two “independent members” appointed by the president with the advice of the Senate Committee on Banking, Housing, and Urban Affairs. These members had three-year terms and had to be from different political parties (US Congress 1989, sec. 501).

The board had several important functions, such as the ability to establish national and regional advisory boards, evaluate audits conducted by the Office of the Inspector General, and generally review the corporation’s performance. In addition, a variety of internal controls were adopted with the passage of FIRREA.

1. The RTC received an annual audit by the General Accounting Office (now the Government Accountability Office) with the help of an independent CPA.
2. The RTC was required to submit annual reports that included audited financial statements.
3. The Oversight Board was authorized to remove the FDIC as exclusive manager if the FDIC failed to adhere to the strategic plan, failed to maintain or achieve financial goals, committed fraud or abuse, and/or failed to obtain value that was close to the market value of the assets it was selling.
4. The clearly defined sunset date of the corporation acted as an internal control mechanism as well, to ensure that the government would not remain as a major player in the mortgage market for longer than necessary (US Congress 1989, sec. 501).

The RTC was authorized to have contractors take part in its resolution activities, provided they complied with any relevant FIRREA provisions and acted as a fiduciary for the assets under contract. These contractors could not be in any way affiliated with or be employed by any RTC-managed institution.

Additionally, the RTC Oversight Board was required to appear twice a year before the House Committee on Banking, Finance, and Urban Affairs and answer questions about the RTC’s activities. The board also published annual reports from 1989 to 1995. Section 501 of FIRREA specified a “semiannual appearance” by the members of the RTC’s Oversight Board to report on:

1. Matters of thrift resolution and asset disposition;
2. Cost estimates for remaining resolution and disposition efforts;
3. The impacts that asset disposition efforts were having on local real estate and financial markets; and
4. Estimates of remaining costs and exposure, additional income, and funding needs (US Congress 1989, sec. 501).

The annual reports, which were publicly available, contained audited financial statements from the corporation, overviews of its asset disposition methods, and comments from the Oversight Board of the RTC (later the Thrift Depositor Protection Oversight Board) about the corporation’s operation. Extensive statistics about the number and cost of resolutions for individual institutions, as well as the number of conservatorships, were also made publicly available through these reports (RTC 1995a).

However, the passage of the Resolution Trust Corporation Refinancing, Restructuring, and Improvement Act of 1991 on December 12 streamlined much of the RTC’s administrative structure and gave it more freedom to act independently. Some of the issues included “the RTC’s need for interim funding and concerns that its dual board structure was cumbersome and inefficient (for example, the Oversight Board had to approve policies recommended by the RTC/FDIC board . . .” (Shorter 2008, 2). Ultimately, RTCRRIA did the following:

1. Repurposed the RTC’s Oversight Board as the Thrift Depositor Protection Oversight Board, which no longer included the secretary of Housing and Urban Development (US Congress 1991b, sec. 302);
2. Abolished the RTC’s board of directors (US Congress 1991b, sec. 310);
3. Removed the FDIC as the exclusive manager of the RTC (US Congress 1991b, sec. 314); and
4. Established the Office of the Chief Executive Officer of the RTC. The CEO was a presidential appointee (US Congress 1991b, sec. 201).

While the RTC was originally envisaged to not have very many employees, staff levels ballooned as well after 1989, rising more than 200% and remaining elevated through the corporation’s “peak” years (i.e., 1989–1991). Around 2,000 employees were transferred to the FDIC when the RTC closed its doors at the end of 1995. See Figure 14 for a breakdown of RTC staffing levels.

The OTS appointed the RTC as the conservator of any previously FSLIC-insured thrifts that became insolvent within the period specified by FIRREA (US Congress 1991b, sec. 201). FIRREA imposed a maximum outstanding obligation limit of $50 billion on the corporation, calculated as the sum of (1) total contributions from REFCORP; and (2) total outstanding obligations, minus the sum of (a) the total amount of cash held and (b) the amount equal to 85% of the RTC’s estimate of the fair market value of other assets held (US Congress 1989). This language required the RTC to return to Congress if it needed more funding, which it did on two separate occasions. Some of the funding came with a deadline that mandated any unused funds to be returned to Congress. The RTC had to return to Treasury $18.3 billion of the $25 billion allowed under the RTCRRIA because it was not used before the deadline of April 1, 1992, even though the funding was appropriated only in January of that same year (RTC 1992). This event marked the beginning of a 21-month-long funding drought for the corporation that severely hampered its resolution efforts (FDIC 1998). Because of its loss-bearing function, the RTC was, predictably, quite controversial, but the decision to so closely tie its funding to Congress remains quite controversial.

The funding of REFCORP was a topic of substantial congressional debate. While the RTC could have been funded completely through appropriations, the costs would have more significantly impacted the federal deficit in the short term (Adams, Peck, and Spencer 1992). Of the original $50.1 billion, $18.8 billion was on budget, appropriated by Congress, and expected to be used by the end of the 1989 fiscal year (September 30, 1989). Off-budget initial funding totaled $31.3 billion, with $1.2 billion provided by Federal Home Loan Banks and $30.1 billion raised by REFCORP. REFCORP was managed by the FHLBanks system and issued long-term (30- to 40-year) debt onto public securities markets to obtain funding. With this funding, REFCORP then purchased nonvoting RTC capital certificates that paid no dividends. Interest on the bonds was paid by the FHLBanks and the US Treasury (FDIC 1998). Structuring the funding this way, Bush administration officials said, “would allow [the administration] to have an increased revenue base under which to finance Federal programs without increasing the deficit or exceeding Gramm-Rudman targets” (Dowd 1989).

While the original $50.1 billion was a mix of taxpayer, REFCORP, and FHLBanks funding, the RTCFA of 1991 and the RTCRRIA of 1991 gave the RTC $30 billion and $25 billion, respectively, in taxpayer funding. These funding infusions brought the total to $105.1 billion for loss sharing (US Congress 1991a; US Congress 1991b). Approximately $87.5 billion in direct taxpayer losses were ultimately incurred (FDIC 1998).

All loss funds were provided via Congressional appropriations, REFCORP, or FHLBanks, and the RTC was to take on any losses realized. Losses were calculated by determining how much the RTC needed to pay to cover depositor claims, then estimating how much it would recover from the sale of that institutions’ assets. Any amount recovered from these sales was considered working capital.

The RTC also had the capacity to file in bankruptcy court to recover on losses. For instance, the FDIC and RTC both filed a $6.8 billion claim against Drexel Burnham Lambert, Inc. in 1990 due to heavy junk bond–related losses incurred by 45 institutions under its management. In the end, the firm settled through a series of structured settlements that entailed periodic cash payments to the FDIC, RTC, and dozens of failed private institutions that had been clients of the firm. Drexel’s bankruptcy arrangements set aside a percentage of the firm’s estate to pay, on a pro rata basis, the litigators (FDIC 2018).

The newly created Office of Thrift Supervision was responsible for placing any insolvent thrifts into conservatorship and appointing the RTC as the resolution authority (US Congress 1989, sec. 201). Any thrifts that had been in conservatorship from January 1, 1989, to August 9, 1989, which was the day FIRREA was passed, were eligible (US Congress 1989, sec. 501). Additionally, the OTS could appoint the RTC as a conservator for any failed S&Ls for three years following the passage of FIRREA (US Congress 1989).

As part of its mandate in FIRREA, the OTS was required to establish new minimum capital requirements for S&Ls. On November 8, 1989, these requirements were entered into the Federal Register (see Figure 8, below): (1) a risk-based capital requirement of 8%, equivalent to the level global bank regulators had recently agreed in the first Basel Capital Accord; (2) a leverage ratio requirement; and (3) a tangible capital requirement (FR 1989).

A notable design aspect in these requirements was the decision to “grandfather” portions of supervisory goodwill—the kind that allowed thrifts to overstate their capital levels to begin with—into the calculations of tangible and core capital levels over a limited timeframe. Specifically, the requirements allowed a percentage of supervisory goodwill—obtained through “the acquisition, merger, consolidation, purchase of assets, or other business combination”—if it had been recorded on or before April 1989 (FR 1989). This amount gradually declined starting in 1992 and was eliminated after 1994 (FR 1989).

Noncompliance was punished differently if it was documented before or after 1991. Thrifts that did not meet these requirements prior to that year faced restrictions on asset growth and were required to submit capital plans to the OTS that detailed how they would satisfy the requirements. After 1991, the penalties for falling under the standards were more severe. The OTS prohibited asset growth; reduced the rates paid on savings accounts; prohibited taking new deposits and issuing new accounts; and even prohibited lending, the purchase of loans, and other investments (FR 1989). According to FDIC Senior Economist Lynn Shibut, there were no quantitative “triggers” for resolution, however, so only institutions that were insolvent were closed by the OTS.

The vast majoriy of the RTC’s assets were real estate related, with about half consisting of commercial and residential mortgages. All other types, such as owned real estate, other assets/loans, and securities made up the other half of its portfolio (FDIC 1998).

Initially, the RTC was eligible to act as a resolution authority for institutions put into conservatorship from January 1, 1989, to August 9, 1992. This horizon was extended twice—first, to September 30, 1993, with the passage of the Resolution Trust Corporation Refinancing, Restructuring, and Improvement Act of 1991, and finally to July 1, 1995, with the passage of the Resolution Trust Corporation Completion Act of 1993 (US Congress 1991b; US Congress 1993).

The RTC resolved 747 insolvent institutions through a variety of conventional resolution methods. These were purchases and assumptions, insured deposit transfers, and straight deposit payoffs. P&As were the RTC’s preferred method of resolution, as they were the most cost-effective.^FNIt is important to note that thrifts that were healthier tended to be selected for P&As, while those with less franchise value or negative equity were more likely to be resolved with either deposit transfers or payoffs. In general, the underlying condition of the thrifts was a bigger determinant of costs than the method of resolution. However, they required a lengthy marketing, valuation, and bidding process that IDTs and SDPs did not need. About two-thirds of resolutions were done through P&As. By the spring of 1990, the RTC also allowed individual branches of failed thrifts to be purchased, thus encouraging a broader group of acquirers to participate (FDIC 1998, 131).

IDTs were slightly more cost-effective than an SDP due to the agent (purchasing) bank’s ability to offer its services to new potential depositors (FDIC 1998, 19). Resolution via a deposit transfer was also preferable because it allowed depositors continued access to their funds. SDPs were used earlier on but were costlier than the other two due to the RTC having to directly pay off all deposit liabilities and take on all assets.

In the event that a resolution prior to insolvency could save taxpayers money, the RTC and OTS developed the Accelerated Resolution Program on July 10, 1990. The corporation theorized that early conservatorship for thrifts that still had some market value would cost more to the taxpayer due to the negative public connotation around conservatorship. The goal behind the ARP was to provide an expedited avenue of assistance aside from conservatorship that still had substantial franchise value and had not been declared insolvent by the OTS. Rather than use broad solicitation methods, the RTC marketed more selectively, using the FDIC’s National Marketing List (the List) in conjunction with the OTS (FDIC 1998). The List aggregated sets of potential acquirers into one database, and the RTC Marketing Section targeted specific potential buyers based on the types of assets that it was scheduling to sell (RTC 1991). Valuation was generally more thorough because the corporation wanted all of a failed thrift’s assets to be offered at sale. While conventional RTC resolutions sometimes had assets sold before the resolution process, ARPs had all of a thrift’s assets on sale. No put options were available for ARP transactions.^FNHowever, there were standard representations and warranties agreements on all ARP transactions. Generally, loans were sold to asset-only acquirers at higher prices than the RTC’s valuations, though lower than prices the FDIC valued them at. This reflected the difference in valuation methodologies, where the RTC was more likely to accept bids that were lower because it tended to account for marketplace realities (FDIC 1998).

Institutions that were resolved via the ARP all were done through P&As, and 41 of the 747 resolutions were ARP. The program’s effect was limited in part due to the RTC’s appropriation expiring on April 1, 1992, and the 21-month funding gap that followed. The costs for resolutions under the program were much less, and a greater percentage of assets tended to be purchased (FDIC 1998). However, the underlying financial condition of the thrift was a more significant factor in determining costs than was the chosen strategy.

Because the RTC functioned as the interim replacement for an insolvent deposit insurer—FSLIC—all thrifts that the OTS put into conservatorship were given the RTC as a conservator. Therefore, the initial acquisition of a failed thrift was at book value, less any provisions that the firm had made at that point. RTC staff then determined the value of the failed thrift’s assets, which helped allocate loss funds and served as a basis to evaluate franchise sale bids.

Much of the corporation’s early efforts in resolution focused on tackling the institutions that had the least franchise value and were taking on the most losses. To quickly resolve these institutions, the RTC relied heavily on straight deposit payoffs and insured deposit transfers. The RTC conducted more SDPs in the earlier years of its lifespan due to the number of institutions that had been deemed insolvent for an extended period of time or were located in acutely distressed markets and had very little franchise value.^FNSee Figure 1 for a detailed breakdown of resolution methods.
 IDTs and SDPs, for these institutions, were the only real methods of resolution left, per FIRREA standards. Because of these conditions, the majority of IDTs and SDPs were conducted from 1989 through 1991, when the stresses of the crisis were most prominent (FDIC 1998). These were the years that the RTC incurred the vast majority of its losses.

For assets that were held onto after resolution, the RTC employed a number of novel measures to sell its more distressed assets first, while recovering more from their disposition than it might otherwise have received.

Pricing. The RTC hired contractors to perform Asset Valuation Reviews (AVRs), which were estimates of the value of assets held by failed thrifts. These estimates were used to evaluate franchise sale bids. Early on, the RTC’s AVR methods were critiqued for potentially overstating the value of receivership assets, due to the staff’s lack of asset sales experience and its decision to sample portfolios prior to acquisition.^FNPrior to 1991, valuation took place on samples that were chosen prior to acquisition, or before the acquirer purchased the “good” (i.e., performing) assets and left the “bad” assets to be handled by the corporation. Because these valuations were then projected across the rest of the portfolio, this may have overstated the value of assets remaining in receivership (RTC 1991). The RTC ultimately overhauled its AVR framework in 1991 and began using more sophisticated statistical techniques to better approximate the recovery value for all sampled assets. Additionally, for each sample the corporation hired “a single experienced contractor” to do all the AVR work (RTC 1991).

Regional and National Loan Auctions. A total of 20 regional and national loan auctions were conducted from June 1991 to December 1995. The corporation established the National Loan Auction Program in September 1992 to better dispose of the considerable pool of “hard-to-sell” assets (FDIC 1998). These auctions generally lasted about two to three days, and potential bidders were required to put down a $50,000 deposit to participate (FDIC 1998).

Approximately 141,000 loans, with a book value of $4.9 billion, were sold for about $2.4 billion, netting the RTC an average recovery value of about 48.8% of book value. Total national auction costs ran to about $30.6 million (FDIC 1998).

There was a wide variety of loans available for sale, and one of the challenges that the RTC faced was that small loans, just like the larger, more complex ones, required the same amount of administrative due diligence. Regional auctions were designed to sell this large inventory of small assets that the RTC had. Thus, it was often in the RTC’s best interest to package and quickly dispose of them to increase its capacity to handle larger accounts. National auctions grew out of the increasing number of nonperforming and hard-to-sell loans, which eventually prompted the RTC to relax its criteria for what loans would be allowed in the auctions. While the program originally was designed for nonperforming loans, eligibility widened as the auctions went on to include performing loans that were not able to be securitized, were underperforming, or had other problems that made them unmarketable. Owned real estate generally included any real property that had a title that was acquired by foreclosure, a deed in lieu of foreclosure, or that was intended to protect the thrift’s interest in any residual debts that had been contracted. Broker listings, normally conducted by SAMDA contractors, were the primary method through which the RTC disposed of ORE, but auction methods become more popular as its ORE holdings grew (FDIC 1998).

Additionally, the corporation did not want to disenfranchise smaller potential bidders and, as a result, stratified some loan packages in its National Loan Auction Program to keep their value below $2 million so that the RTC’s Small Investor Program could market them to smaller, noninstitutional investors. ORE was a particularly challenging portion of the RTC’s portfolio. Because it was often acquired under particularly stressful circumstances, ORE was often lumped into pools with other nonperforming loans and related instruments. Significant growth in the corporation’s ORE portfolio forced it to turn to an auction method to more rapidly dispose of its portfolio of these assets (FDIC 1998).

Use of Contractors. Since the RTC was so quickly expected to resolve and dispose of hundreds of billions of dollars of assets, FIRREA specifically mentioned that the RTC would be allowed to use private contractors so long as the corporation determined that “. . . utilization of such services [were] practicable and efficient” (US Congress 1989).

RTC contractors, operating under Standard Asset Management and Disposition Agreements, were normally given loans or asset pools that were either nonperforming or had less franchise value overall. The RTC did not have the staffing nor the requisite experience in asset disposition to properly value, market, and sell many of the hard-to-sell assets, and thus chose to rely more heavily on private contractors (FDIC 1998).

SAMDAs typically had terms of three years but had the option of three one-year extensions, if needed. Original SAMDA contracts, called SAMDA I, had their fee structures tied to the sales of individual assets. SAMDA II contracts, which began in April 1991, had their disposition fees tied to the performance of the entire pool of assets that the contractor was managing. These contracts could also be amended to include only asset management and not disposition responsibilities.^FNThese amendments were called Standard Asset Management Agreements, or SAMAs, which were amendments to the structure of a SAMDA contract. Per the name of the contracting agreement, these entities, which were often asset or property management firms, had full management and disposition authority. Entities under a SAMDA contract were also mandated to enter into subcontracting agreements with other firms to help them speed up parts of the disposition process. A total of 199 SAMDAs were issued to 91 contractors, covering about $48.5 billion in failed thrift assets (FDIC 1998).

Securitization. The RTC helped pioneer a substantial private securitization effort starting in December 1990. This initiative was done because many of the assets had several undesirable qualities, such as “documentation inaccuracies, servicing problems, and late payments” (FDIC 1998). As the need to reduce the size of the RTC’s balance sheet increased, so too did the types of collateral that the corporation made eligible for securitization. Other assets, including commercial mortgages, multifamily properties, and consumer loans, were included as time went on. The RTC was forced to deal with informational deficiencies, particularly with its commercial securities, that hampered its sales. The Corporation would eventually author Portfolio Performance Reports (PPR) that would go on to become industry standards amongst issuers of securities (FDIC 1998).

To ensure that there would be sufficient demand for private securities, the RTC initially pushed for a government guarantee on them. However, the RTC’s Oversight Board did not support a government guarantee due to the corporation’s temporary nature and the potential for its securities to compete with others issued by the US government. When this failed, the RTC instead backed them with cash collateral for external credit enhancement features, such as overcollateralization, subordination, and cash reserve funds to ensure they would receive high ratings (FDIC 1998). The cash reserves often were in excess of 30% to 40% (Effros 1997).

To increase the pool of potential investors, the RTC also tied the interest rate of many of the residential MBS to the London interbank offered rate, making them more attractive to international buyers. Additionally, many of the commercial securities also had substantial representations and warranties, such as repurchase agreements and environmental indemnifications, which made purchasing them more attractive (FDIC 1998).

Fannie Mae and Freddie Mac were involved in an initiative called the Agency Swap Program, in which they either engaged in cash sales to buy pools of conforming residential mortgages or swapped these pools of mortgages for Fannie and Freddie securities. Due to their agreements with the RTC, Fannie Mae and Freddie Mac also required significant credit enhancement on the part of the corporation to take on the pools of loans.^FNThis credit enhancement was usually in the form of cash reserves withheld from the purchase price of the loan pool. Approximately $6.1 billion of conforming residential mortgages were sold to the GSEs (FDIC 1998).

The RTC also launched a commercial securitization program in January 1992, which was one of the precursors to the commercial real estate securitization boom that followed shortly after the S&L crisis. These commercial securities comprised commercial loans that often had missing documentation, were in arrears, or had multiple original lenders. As a result, large credit-enhancement levels were necessary to obtain high credit ratings from rating agencies. There were a total of 72 residential and commercial MBS transactions, totaling $42.2 billion (FDIC 1998).

Equity Partnerships. The RTC formally introduced these partnerships in the fall of 1992, in part due to the huge inventory of nonperforming loans that it still held. In these partnerships, the RTC acted as a limited partner (LP) and provided troubled assets while a private entity acted as the general partner (GP) and manager of these assets. Equity capital was provided by both the LP (as asset pools) and the GP. Additionally, the GP received a pro rata portion of the proceeds from the net recovery on any assets (FDIC 1998).

The corporation believed that, for hard-to-sell pools of assets, joint ventures were a more cost-effective method of disposing of them compared to a direct sale (FDIC 1998). These partnerships later were expanded and geographically parsed out so that the corporation could more widely market them to smaller, noninstitutional investors, similar to their auction-based efforts.

The RTC was originally scheduled to be shut down on December 31, 1996. However, this shutdown date was moved up to December 31, 1995, with the passing of the Resolution Trust Corporation Completion Act in 1993 (US Congress 1993). If any thrifts remained in conservatorship or receivership after December 31, 1995, the FSLIC Resolution Fund became responsible for them (FDIC 2018). Additionally, all assets and liabilities of the RTC were transferred to the FRF, which then transferred any profits from the sale of these assets to REFCORP to help it pay off any residual debts.

In total, the RTC used seven different types of equity partnerships over the course of its operation.^FNSee FDIC 2018, chapter 17, for more information on equity partnerships. A total of 72 partnerships, comprising $21.4 billion (book value) in assets, were created, with the LP and GP receiving proceeds based on their share of ownership (FDIC 1998).

Asset putback provisions, or put options, were often used in lieu of more robust representation and warranty agreements early during the S&L crisis. The initial terms on these provisions were anywhere from 30 to 90 days but were extended to 18 months in the spring of 1990. The RTC sold about $40 billion in assets that had put options on them, and more than $20 billion were returned, indicating that institutions often picked and chose which assets to keep (FDIC 2018).

The RTC was initially hesitant to include robust, market-oriented R&Ws, as they represented, in theory, a substantial source of potential liabilities if the asset was not of sufficient quality or managed well. However, a product without R&Ws was seen as being potentially riskier. Initially, the RTC tried to avoid putting R&Ws on its sales of loans largely due to a lack of experience, and in some cases opted to use put-option clauses as a way to avoid using them (Moreland-Gunn, Elmer, and Curry 1996). The risk-based concerns, as well as the RTC’s relative lack of experience in selling troubled assets, made selling much of its loan portfolio much more difficult throughout the early 1990s (Moreland-Gunn, Elmer, and Curry 1996). As a result, the RTC eventually ended up expanding its R&W criteria to be more in line with what market participants were offering (Moreland-Gunn, Elmer, and Curry 1996).

Valuation for loan sales was normally done through appraisals and in consultation with Wall Street investment houses and other, similarly qualified firms. For structured transactions, it used an asset valuation methodology called derived investment value (DIV), which “attempted to value individual assets packaged for portfolio sales as investors would perceive the value of those assets” (FDIC 1998). This threshold was, in March 1991, reduced to 70% with an amendment to FIRREA to accelerate the disposition process (FDIC 1998).

The RTC Completion Act of 1993 amended both the sunset and eligibility dates to December 31, 1995, and July 1, 1995, respectively (FDIC 1998). The 30- to 40-year REFCORP bonds are still being paid down today, with the last bonds set to mature in 2030. Total interest costs were projected to be around $88 billion (GAO 1996).