US Treasury Secretary Henry Paulson has moved to bail out banks from their troubled real estate assets in a move reminiscent of the 1989 creation of the Resolution Trust Corporation (RTC).
Paulson said in a press conference today that an “asset relief program” would involve “hundreds of billions” of taxpayers’ dollars and be “sufficiently large [enough] to have maximum impact.” It would, he said, help unclog the US financial system and prevent further banking failures.
The plan, to be hammered out in cooperation with Congress over the weekend, could be reminiscent of the RTC opportunities of the early 1990s, when hundreds of billions of dollars of real estate-backed loans were sold at steep discounts. The RTC is credited with spurring the rise of the private equity real estate industry.
Paulson did not speculate on what shape the organization would take, merely saying: “This is the way we stabilize the system.”
In his statement, the Treasury secretary said the approach being taken would “cost American families far less than the alternative – a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion.”
The move is being seen as one of the biggest expansions of federal power over the financial system since the Great Depression.
As part of the package of measures announced today, Paulson said he would also temporarily insure money-market mutual fund holdings and expand Federal Reserve lending to commercial banks, particularly through Fannie Mae and Freddie Mac, which the government took over last week.
Savills’ real estate investment banker Jeffrey Baker said it was vital to get a “definitive and aggressive resolution” to the problems. But he warned PERE the turmoil being faced by the world’s financial markets could be “much larger than most people realize.”
The executive managing director said the complexity of the mortgage markets today, compared to the 1980s, would only add to the pain. “Defaults on commercial mortgage-backed securities have been low to date, but there is a huge wave set to mature over the next two years. This is going to be a very, very significant problem and we need a quick resolution,” he said.
According to reports, the options being considered by the government include the creation of an RTC-style entity that would take both good and bad assets from financial institutions; an organization that takes on just the “bad” assets and an idea raised by Democrat Senator Charles Schumer to set up a federal agency that would take equity stakes in struggling financial institutions.
“The RTC model, by taking distressed assets off the books of troubled institutions, would simply transfer excessive risk to the US government without addressing the plight of homeowners,” Schumer's office said in a statement.
The RTC that current plans are being compared with came in response to the savings and loans crisis of the late 1980s. The US government decided to create the RTC to hold around $394 billion of debt products and then to sell them off at vastly reduced prices.
Financial institutions such as Goldman Sachs’ Whitehall funds invested heavily in the assets and went onto become among the world’s largest private equity real estate firms.