Banking: Transfer Toxic Assets to a New RTC

Euthanize the Brain-Dead Banks
Bypass the Lame Politicians

The time has come to play hardball with the toxic assets retarding our economic recovery. Only then can we euthanize the brain-dead financial institutions, rescue the ones worth saving and get the surviving banks to start lending again.

Bankers do not want to sell their toxic assets because it would require them to take an immediate hit to their balance sheets. It would also negatively impact their earnings and reduce the value of their stock.

Equally as egregious, they keep renewing shaky loans as if divine intervention will rescue ill-conceived projects that never should have survived the underwriting stage. But formally recognizing these bad loans would require the banks to add more capital to their loss reserves. That would also depress their earnings.

Moreover, politicians do not have the courage to make tough decisions. That is because taxpayers and investors will have to suffer the pain whether the write-downs are taken sooner or later. But politicians would rather kick the can past the next election hoping that the problems will disappear by themselves.

To solve the dilemma, the Obama administration needs to bring back a Resolution Trust Corporation-type of entity. You may recall that RTC successfully mopped up defaulted assets after the savings and loan association crisis during the 1980s. It can work again. Bill Sideman, a former chairman of the Federal Deposit Insurance Corporation, headed it up. Back then, RTC acquired and disposed of assets owned by failed S&Ls and put thousands of people back to work in the process.

In the current situation, the new RTC would acquire toxic assets such as subprime, mortgage-backed securities, defaulted loans and foreclosed real estate owned by FDIC-insured institutions. It would be easy to do with failed institutions. But they should also force the purchase of toxic assets from foundering banks. These banks are not able to resume normal lending operations because they are not willing to dispose of their toxic assets at the current market values.

The price for the new RTC to acquire the toxic assets can be established by impartial, third-party appraisers. It is probable that the appraised values will be less than the current amounts being booked by the banks. Nevertheless, the banks should be required to sell and take the hit now rather than waiting to write them down later. By waiting, they are prolonging the economic recovery.

Just like with the old RTC, the new entity will need companies and individuals that can manage properties, find renters and buyers, and repair the properties that are in disarray. Appraisers and real estate agents will also be in demand. Putting these people back to work will help stimulate the economy.

The new RTC will acquire the toxic assets at current market values and be willing to sell them at a discount. Due to the large volume, RTC will look for vulture-fund buyers that are willing to purchase large assemblages of distressed assets at bargain prices. Being an independent entity, there will be less political pressure preventing it from doing what is necessary to quickly move the assets into the private sector. RTC will not be in the business of holding these investments in their portfolio any longer than is necessary. And as the old RTC did, the new RTC will cease to exist after all the assets are sold.

Forming an RTC-type entity gets the politicians out of the process and expedites the disposition of toxic assets. More importantly, it will get the banks back into the lending arena to revitalize businesses and accelerate our economic recovery.

Jerry Chautin is a volunteer SCORE business counselor, business columnist and SBA's 2006 national "Journalist of the Year" award winner, tenonline.org/sref/jc1bio.html. He is a former entrepreneur, commercial mortgage banker and business lender.

Follow Jerry Chautin on Twitter: www.twitter.com/JerryChautin

Comments

[Aaror]

How about we send the FDIC in with a real mandate to evaluate the biggest banks. The ones that have too much toxic assets are liquidated, and the Fed takes ownership of all assets. In time the customer lists, name, and other assets of the bank can be sold to other banks that were better managed, and if a profit is made, the stockholders of the bailout banks can get those profits. If there is a loss, bondholders can absorb it.
Once all those toxic assets are owned by the FDIC, they can be unraveled, simplified, and re-sold.

[comicpro]

I sit and read this article and try to digest the fact that these made up instruments which contributed ZERO value to the US economy yet made the people who sold them tons of money are now being reshuffled to another entity that is akin to off balance sheet accounting. I swear they think of more ways to make themselves look good rather than bite the bullet and write them down to acceptable levels!!! So in summation all the current financial institutions that carry these assets are LYING about the true worth of their balance sheets and are getting away with it even though the Government knows they are lying because shareholders may get hurt.......somebody tell me why I should give a shi_!!!!!!!!!!!

[Jerry Chautin - Huffpost Blogger]

Given the lessons learned from the S&L crisis, better decisions are made by removing the assets from the financial institution in placing it in a less politicized entity such as RTC. I will place my bet on the winner of the S&L crisis-race when the other government­-controlle­d entities were futzing around with no solution to the problem.

Thanks for your comment.

Jerry Chautin

[comicpro]

So Jerry you are of course in agreement to continue to kick the can down the road instead of writing the assets down????? How can anyone value these "assets" if no one wants to buy them?? And the biggest red flag has to be the fact that the people who inventd them, sold them and profited from them are not willing to jump in and set a market. I guess its easier to be a capitalist when times are good and a socialist when they need a bailout. If I ran my business like that as a small business owner the doors would be closed. And these things need to be politicized. Hiding their destruction has gotten us where we are today. Yeah I know Wall Street can police themselves. Now excuse me while I go throw up.

[sonofsamphm1c]

Resume what lending?

There is a lot of lending being done. It is to very credit worthy borrowers. In general credit worthy borrowers are reluctant to take on more debt. That is how the became so credit worthy. To resume lending levels that existed before the financial crisis, the banks would have to resume lending to unworthy borrowers.

How did that work out?

[DiogenesOfAlaska]

No, I don't think that it's that simple. The gap in your argument is that it doesn't account for the stressed balance sheets of the banks themselves. That's what makes them behave differently from before the crisis.

[sonofsamphm1c]

So the precipitous drop in the demand for lending had nothing to do with it? There are no exotic subprime originations. Borrowers now have to qualify - demonstrate an ability to pay loans back.

The argument that "toxic" assets are preventing the return to previous lending levels is very doubtful. And returning to previous lending levels would be very stupid, and, fortunately, impossible.