Skip to comments.The cost of the 1990s RTC Bailout
Posted on 09/20/2008 9:46:19 AM PDT by koraz
The RTCs cost for handling those failures was estimated at December 31, 1995, to be $87.5 billion, or about 22 percent of the assets at time of failure. (page 25)
The $87.5 billion in costs was almost twice the initial $50.1 billion FIRREA appropriation, but it was substantially less than the high end of the range that the U.S. Treasury predicted at the peak of the cycle in June 1991 of close to $130 billion in 1989 present value costs or $160 billion in absolute dollars. (page 25)
Another factor influencing the ultimate resolution costs for the RTC was inadequate or delayed funding. As previously discussed in this chapter, interruption of funding occurred before passage of each of the three funding bills.
Because of the large percentage of nonperforming assets, those institutions liquidity needs were funded through deposit liabilities. If those institutions had been resolved promptly, carrying costs would have been reduced because assets retained by the RTC were funded at RTC borrowing rates rather than at the higher insured deposit rates.
(Excerpt) Read more at fdic.gov ...
My take is that there are times when government intervention is needed. If done properly, it does not turn to socialism or result in astronomical costs to the taxpayers. A key difference between this crisis and the S&L was that the S&L had a guarantee behind it. The RTC was required to pay depositors 100% but was selling the assets for 30% or so. In this case, the government will be buying assets that are already marked down (perhaps to 35%). It is quite possible that if the taxpayers don't panic that they can actually MAKE MONEY on this deal.
I would like to see others do some research on this.
Don't think so, actually value of the millions of homes could be well below the base year value of 1996 or 1998. Most all appreciation from that point on was bogus. If the time and value of money during that period of time means anything.
A few points:
1) This will absolutely dwarf the RTC bailout.
2) The government does not have the time to set up an RTC-like organization. The old RTC took almost 2 years to get set up. Therefore, they will just give the "power" to some organizations (likely the Fed, Fannie Mae, and Freddie Mac) to accomplish their foolish "goals".
3) Everyone needs to remember that this bad debt that the government (we) are taking on does not currently have "value" assigned to it. In other words, they have no clue what, and how much, they are dealing with. Without value, it is impossible to say that there might be a profit on it (There won't be).
Seems to me that with the debt now to be $11.3 Trillion and not a large part of that debt will be in bad debt securities, it’s just moving a past due bill from one dresser drawer to another. It will still come due at some point. The largest problem is no one really knows how much the bill is for.
They are too busy:
1. Getting on their makeup
2. Getting their hair done
3. Preaching their opinion to viewers/readers
to bother with actual reporting.
I am not a big fan of bailouts either, but when the government steps in an says you need to lend money to these people with little prospect of paying it back, then we unfortunately need to make good on the peoples business we regulated into losses.
Additionally while the economy is strong, we don’t need to undermine with undermining the confidence in the financial markets.
Yeah there were some stupid RINOs on board with handing out free money ... You can probably name them off the top of your head.
Two questions, why aren't cells for the CEOs being prepared next to Ken Lays and why are the Democrats in Congress getting a pass?
A video that explains all, some really bad language at the end ...
Point 1 - absolutely dwarf the RTC - agree. Your point??
Point 2 - With the RTC they needed to make it up as they went, today we have the history to help us. Yes it will take some time but why don’t we have the time to set up an RTC organization?
Point 3 - I am amazed by your pessimism. Do you want to see another Great Depression to prove your point!! Clearly these assets have deflated values due to the panic in the market. Once you take the panic out, the values will return. As the RTC experience proved.
As for profit, if you are buying something for $.35 on the dollar, you have much more upside than downside. You keep forgetting that there are assets behind these mortgages.
To me it is useless to point blame unless it serves to provide a solution. We can’t look back. The fact is that we are in this mess. A solution is needed.
I don’t disagree with you that part of the solution will be to round up the guilty. Beside out right criminal behavior, pressure should be applied (or lawsuits) to recover funds from those CEOs responsible for the mess. But, that is only part of the solution.
We'll let history show which of us is right in our analysis. I'm basing mine on real, past events.
No, I don't want a depression - but that is where we are. I want my kids and grandkids and all future generations to have a country that still exists and can function.
Some are saying that the taxpayer actually made money with the first RTC as well but I haven't been able to find facts to back that up.
I am not sure I agree with you assumption that home values are well below the 1996 or 1998 base year. Do you have FACTS to support that??
But let’s just say that you are right. These assets are already being priced as $.35 on the dollar. So, a house bought for $100,000 is now valued $35,000. Are you saying that it is worth less than that? If so, what would the 1996/1998 price be??
I backed up my opinion with historical facts about the RTC. Where are your facts??
BTW, I think the video is a good simplification of the issue. What is missing is the beginning. The mortgage was used to buy real estate. The real estate has some value. Currently the market says that value is 35% of the original cost.
So, there is a pony under the crap. Panic will only serve to pour more crap on the pony. Unles you believe that it is the end of the world, at some point this real estate will start to increase in value.
And your solution is??
The Fed and Treasury have stated over the last few days that they will be dividing the bailout into 'tranches' of $50 billion dollars each. So there will eventually be upwards of 14 tranches.
Do you understand what a tranche is? It's kind of like a trash can at a mall. At the end of the day, it's filled with a wide variety of refuse all bundled into the same "transaction".
Part of the problems with tranches is that they oftentimes are overrated by ratings agencies and the risks are underestimated by investors.
The toxicity still exists, it's just that the government sprays some perfume on the garbage.
This is the government's current "solution" that they will be passing next week.
Those statements about the taxpayers making money on the RTC was the reason I researched this. Based on this report I don’t think the statement is true. But, it does depend on the definition of “is.”
The cost was $87.5 billion. At one point, the cost was estimated to be $160 billion. So if you compare the actual cost to the estimated cost, the taxpayers did make money!
Interesting way of looking at it!
Let's hope this RTC works out the same way.
If the government, and by that I don't mean "we the people" who used to be the government but I mean our elite class rulers, buys these assets at fire sale prices and sells them at bargain rates, they will devalue all of the assets held by citizens and decrease their equity and net worth. At the same time they are increasing the debt us citizens are on the hook for thus making our financial condition even worse. The professed "good intentions" cannot mask what Ross Perot said best, "the government not working for you but coming at you."
To all the corrupt, incompetent politicians and Bush bureaucrats, thanks a lot!
As a CFA, I think I do understand what a tranche is. You, however, have it a little wrong.
Basically with these securities you look at the stream of future cash flow payments. These cash flow payments are divided up and grouped into like kinds (interest with interest, principal with principal). Yes, some of these are garbage (interest only on a defaulted loan). But some are not (principal). If all are written down to 35% that means the garbage is overstated BUT the good tranches are not.
As long as the Feds get the real estate behind all these securities, there will be value there.
Can’t disagree with your comments “Thanks a lot.” But, we are where we are. The key is not to make it worse.
Think about it. The “government” will only sell at fire sale prices if there is pressure by “we the people” to wind this up quickly. If we understand the economics of panic situations “we the people” are better served by allowing a slow orderly resolution to the situation.
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