What it means
Savings and loan associations, also called thrifts, were institutions that took deposits and made mortgage loans. During the 1980s many failed, because they borrowed short-term at rising rates to fund long-term fixed-rate loans, and because deregulation allowed riskier lending, some of which turned out badly.
The legislation that created the Resolution Trust Corporation, the Financial Institutions Reform, Recovery and Enforcement Act of 1989, also restructured the regulation of thrifts. The agency was given the job of closing or merging insolvent institutions and selling their assets, including mortgages, commercial property and other holdings.
The aim was to protect insured depositors while getting the best price for the assets, which were sold over time to avoid crashing the market. Methods included selling whole institutions, packaging loans into securities and auctioning property.
Selling in stages gave local property markets time to absorb the supply. The agency became known for making wide use of asset securitisation, which is the practice of pooling loans and selling investors claims on the payments, and it helped build the market for such securities.
It also helped to develop standard disclosure and valuation methods for troubled loans. The Resolution Trust Corporation was closed at the end of 1995, with remaining work passing to the Federal Deposit Insurance Corporation.
The cost to taxpayers was large, and the episode led to tighter capital and supervision rules for financial institutions. For finance professionals, the story remains a case study in how to resolve many failed institutions at once, using clear rules, public reporting and a fixed end date.
It shows the trade-off between selling quickly at a loss and holding assets until markets recover.
In practice
Real-world examples.
Example
An investor group buys a package of mortgages from a failed thrift at a discount through a sale run by the agency. An investor group buys a package of mortgages from a failed thrift at a discount through a sale run by the agency, after its analysts have sampled the loan files.
Example
A property developer buys a half-finished office building that the agency took over when its lender failed. The developer completes the project and sells it, which turns an idle asset back into productive property. The developer's finance team values the building using the likely rents, not the original construction cost.
Example
A business school professor uses the corporation's history to teach how securitisation and asset disposal work, and asks students to compare it with later government interventions in banking. The class debates whether selling quickly or waiting for prices to recover leads to a better outcome for taxpayers.
Case study
Seen in the real world.
Prairie Home Savings is an illustrative, fictional thrift that had made large loans to speculative property projects and then saw land values fall. Regulators found that its liabilities exceeded its assets and closed it, handing its assets to a clean-up agency similar to the Resolution Trust Corporation.
The agency's valuers sorted the assets into good loans, doubtful loans and properties. Good loans, worth about $60,000,000, were bundled and sold to investors, while doubtful loans were sold at a discount of 40% and properties were auctioned over two years.
Depositors were paid in full through deposit insurance, and the sale proceeds recovered a large part of the cost. Regulators also reviewed the lending decisions that led to the failure, so that the same mistakes were less likely to recur. Throughout the process the agency published regular reports on cash recovered against the book value of the assets. The illustrative lesson is that careful sorting and phased selling can reduce losses when a financial institution fails.
Watch out
Common mistakes.
- Believing the Resolution Trust Corporation was a bank that lent money, when it was a temporary agency that managed and sold failed institutions' assets.
- Thinking it still exists, when it was closed in 1995 and its functions moved to the Federal Deposit Insurance Corporation.
- Confusing it with the later government programmes of the 2008 financial crisis, which were separate and used different tools.
Questions
People also ask.
Why was the Resolution Trust Corporation created?
It was created to deal with the large number of failed savings and loan associations after the crisis of the 1980s and to protect insured depositors.
What happened to the assets it sold?
They were sold to private investors through whole-institution sales, loan pools, securities and auctions, which returned the assets to private ownership and allowed new investors to buy them at prices reflecting their risk.
Why is it still discussed today?
Its methods in asset valuation, securitisation and orderly sale are still studied as a model for resolving widespread bank failures, along with the lessons about transparency and speed.
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