Establishment of the RTC

Enacted under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) in 1989, the Resolution Trust Corporation was created as the primary vehicle for resolving the hundreds of failed S&Ls holding over $400 billion in assets at that time. The RTC essentially took over as a custodian for shuttered thrifts, managing and disposing of their assets while working to make depositors whole through the insurance funds.

“The RTC was designed to be a strict construction – get in, sell off the assets in an orderly manner, and get out,” said William Seidman, who served as the first chairman of the RTC after previously leading the FDIC during the crisis.

With broad resolution powers and $50 billion in initial funding from the U.S. Treasury and bonds issued by the Resolution Funding Corporation (REFCORP), the RTC set to work on the monumental task of unwinding the failed S&L sector. This included taking control of real estate properties, loans, securities and other holdings from failed institutions across the country.

The sheer magnitude of the RTC’s mission was staggering. At its peak in 1991, the agency employed over 8,000 full-time staff and oversaw a portfolio of:

– Over 100,000 real estate properties

– $90 billion in loans and mortgage-backed securities 

– Equity stakes in over 300 real estate projects

– Billions in distressed junk bonds and other assets

Disposition Efforts and Challenges

Over its seven-year operational lifespan from 1989 to 1995, the RTC became one of the largest property managers and real estate companies in the world as it worked to dispose of the assets under its control. The disposition strategy focused on packaging and selling off holdings through public auctions, securitization offerings, equity partnerships and other means in an effort to maximize returns.

However, the agency faced immense challenges given the sheer volume of distressed properties and loans flooding the market simultaneously. This created a glut of supply that severely depressed prices and recovery values across asset classes.

According to the RTC’s final report, the average recovery rate on the $619 billion in assets under its control was just 85 cents on the dollar. For certain categories like junk bonds and direct equity investments in real estate projects, recovery rates were even lower in the 30-40% range.

“We were dealing with a massive fire sale scenario where we had to move assets quickly, even if it meant accepting discounted pricing,” said former RTC CEO Albert Casey. “Our mandate was to be as cost-effective as possible for the taxpayers.”

To manage and maintain the massive real estate portfolio under its control, the RTC had to take extraordinary measures. This included contracting with over 7,000 private property management firms and deploying an army of contractors to secure, repair and rehabilitate dilapidated properties.

The agency also got creative in devising new methods to move assets, such as:

– Selling properties through video marketing campaigns

– Auctioning off semi-trucks, construction equipment and other assets

– Contracting with real estate brokers on a national scale

– Packaging distressed mortgages into securitization vehicles

“We had to be innovative in finding ways to handle all of these assets across the country,” said Casey. “It was an operation unlike anything the government had seen before.”

Massive Taxpayer Bailout

Despite the RTC’s aggressive asset disposition efforts, the scale of the S&L insolvency crisis ultimately required a massive taxpayer bailout to fund the resolution process and cover depositor payouts through the insurance funds.

According to data from the U.S. Treasury Department, the total cost of resolving the hundreds of failed S&Ls reached $124 billion after including:

– $76 billion from the RTC resolution efforts

– $48 billion paid out by the Federal Savings and Loan Insurance Corporation (FSLIC) deposit insurance fund

This $124 billion bailout figure represented over 3% of the United States’ GDP at that time and one of the largest government rescues of a private industry in the nation’s history. The costs were funded through a combination of U.S. Treasury contributions, funds raised through REFCORP bond issuances backed by remaining S&L assessments, and the depleted FSLIC reserves.

“The bailout tab was staggering, but the costs of not intervening would have been far higher in terms of economic damage and loss of confidence in the system,” said Treasury Secretary Nicholas Brady, who oversaw the resolution efforts.

The RTC’s final report estimated that its resolution activities ultimately returned $184 billion to creditors and depositors, with over $650 billion in total resolutions completed. However, the agency’s very existence was a stark reminder of the catastrophic regulatory failures that allowed the S&L crisis to spiral out of control in the first place.

Lasting Impacts

While the RTC successfully completed its Herculean task of resolving the failed S&L wreckage by 1995, the impacts of the crisis and subsequent bailout left lasting scars on the financial system, regulatory landscape and public psyche.

The resolution process accelerated the consolidation of the S&L industry, with the number of remaining thrifts plunging from over 3,000 to just 1,645 by 1995 according to the Office of Thrift Supervision. Many were acquired by commercial banks in a wave of mergers and acquisitions.

It also reshaped regulatory oversight of the financial sector through the creation of new agencies like the Office of Thrift Supervision and a renewed focus on capital requirements, risk management and governance controls implemented through FIRREA reforms.

“The S&L debacle was a wake-up call that regulatory lapses and unchecked speculation have severe consequences that ultimately get passed on to the taxpayers,” said Seidman. “We simply could not allow something like that to happen again without putting stronger safeguards in place.”

Perhaps most significantly, the $124 billion taxpayer bailout crystallized public anger over the crisis and perceived excesses of the financial sector. This laid the groundwork for future reform efforts and the push to insulate the system from excessive risk-taking that could necessitate future government rescues.

The political blowback over having to fund such a massive bailout also ushered in an era of heightened scrutiny over regulatory capture and the cozy relationships between Wall Street and Washington that were viewed as contributing factors.

“There was this pervasive sense that the American people had been fleeced by a combination of regulatory incompetence and industry recklessness,” said Bert Ely, a financial institutions expert. “It shattered confidence and drove an appetite for reform.”

This dynamic played out in subsequent decades through legislative efforts like the Gramm-Leach-Bliley Act in 1999 and the Dodd-Frank Act in 2010 – both aimed at modernizing regulatory regimes and improving oversight in the wake of major financial crises.

While such reforms have had mixed success in preventing future meltdowns like the 2008 crisis, the S&L debacle underscored how costly regulatory inaction can be. It served as an inflection point in rethinking how the financial sector is governed to protect taxpayers and the broader system.