Banking: Transfer Toxic Assets to a New RTC

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.
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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.

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