Commentary: The Rtc's Epitaph: It Worked

Even for the U.S. government, it was a colossal undertaking: In 1989, Uncle Sam created the Resolution Trust Corp. to dispose of the assets of hundreds of failed savings and loans. The RTC quickly became the nation's largest financial institution, eclipsing even Citibank.

From the start, RTC officials faced enormous skepticism. Critics charged that RTC sales tactics, aimed at unloading assets as quickly as possible, were enriching wealthy investors while undermining local real estate markets. And persistent whiffs of scandal--from Price Waterhouse billing the government $25 million for photocopying at one San Diego thrift to charges that then acting RTC chief Roger C. Altman gave the White House an improper "heads up" on the agency's probe of Whitewater--only fed the perception that the RTC was spinning out of control.

But now that the RTC has closed its doors for good--on Dec. 31, a year ahead of schedule-- it should be commended. Despite federal rules that hindered its negotiating flexibility and a civil-service pay scale that made talented managers hard to recruit, the RTC transformed itself into a Washington rarity: a federal agency that worked. "The RTC did a pretty good job, given that they were expected to be entrepreneurial--which is hard for most government agencies to do," says Bert Ely, an Alexandria (Va.) financial consultant.

OLD HANDS. The RTC mostly was run by experienced business executives such as former American Airlines Chairman Albert Casey. Management, in turn, signed over 100,000 contracts with real estate professionals who managed properties, held auctions, and packaged assets to be sold on Wall Street as securities.

The bottom line: Of the $456 billion in assets that it inherited, the agency recouped $395 billion, an impressive 86% return. As a result, the thrift cleanup, including the expense of running the agency, should cost taxpayers about $145 billion--far less than the most dire forecasts. Having disposed of a jumble of 747 ailing S&Ls--25% of the industry--the government has left a legacy of 1,460 remaining institutions, 90% of them operating in the black. What's more, the RTC's rapid sales helped establish a floor for the moribund real estate market and dispelled a cloud that could have weighed down the economy for a decade.

Not that the thrift liquidation agency still hasn't much to answer for. It presided over one of the largest wealth transfers the nation has ever seen. The RTC's insistence on bundling some assets into pools so big that only the largest Wall Street firms could bid severely limited the pool of potential buyers and allowed early takers to reap annual returns of up to 40%.

However, other nations, especially Japan, could learn much from the RTC. Japanese leaders are still trying to contend with an estimated $800 billion in worthless assets on their banks' books. They plan to develop an RTC-like institution to dispose of failed housing-loan corporations, but they have been loath to do the same for troubled banks--a big reason why that economy remains so weak.

The U.S. thrift crisis was painful, all right, but better policies emerged from the suffering. Banks and thrifts now must meet higher capital standards. And a 1991 law forces regulators to act as soon as an institution's tangible equity falls below 2% of its assets. In addition, a year-old law restricts maximum payments to depositors in failed institutions to the $100,000 insurance limit, thereby imposing some market discipline.

Washington still hasn't learned all the right lessons. Regulators have yet to find a way to keep banks from placing big bets on interest rates. Dozens of banks got stung by rising rates as recently as 1994. But on Dec. 12, a group of federal examiners pulled back on a plan to require greater disclosure of interest-rate risk at banks by March.

Today, though, there's probably little risk of surging rates flattening banks anytime soon. And all things considered, the U.S. economy looks strong for the moment--in no small part thanks to the RTC's success. Chalk it up as one case where government bureaucrats really did what they set out to do--and then turned out the lights.

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