History does not repeat itself, but it rhymes.
The latest verse concerns the RTC, short for Resolution Trust Corporation.
The RTC was formed in 1989 to take over and quickly liquidate the assets of failed thrifts that had been taken over by the federal government.
For a lot more detail on the RTC, check out these FDIC reports on the subject.
There are a couple things people longing for an RTC rescue should keep in mind.
First, the RTC sold off assets the federal government had already taken over. A new RTC would have to gather up assets in order to liquidate them.
Second, the current crisis was a slice and dice operation. Pieces of mortgage-backed instruments have been sold around the world. Much tougher to figure out who to bail out and how to get all that paper back together.
Third, it took a long time to figure out how to structure the RTC and it only came about after a lot of political pain.
Fourth, this bailout could dwarf the RTC in size and scope. We're talking trillions here.
Fifth, ouch.
Comments
Adam,
You make some excellent points.
However, the lesson of the last year has been that all this paper keeps getting worse, not better.
Yes, we have had an asset spiral. The government hopes to end the downward pressure, but that doesn't mean it will rise a lot in value. There are a lot of real losses to be taken as the price of homes find their real value.
If they are smart about it the goverment could actualy make money here. Afterall not all paper is junk. There's a lot of panick and uncertanity surrounding the whole issue that's why the value of those securities sank. But once the dust settles we might find out all of this is worth much more than previously thought. Look what happened to AIG. Only couple of days ago the company was worth 10 bln. Today it's almost twice as much. In six months it might be worth 100 bln. Anything above this amount is pure profit for the goverment which has 80% stake.
10% profit from 1 trilion is 100 bln. That means profits from this operation could give us back what we put into the system through fed.
You know what they say: buy when everyone is selling sell when everyone is buying. Or: buy the rumors sell the facts. And this is exactly what it is right now: just rumors. Nothing more. Nobody really knows how much all of this is worth. That's why everyone is trying to get rid of it asap. That inevitably leads to lower valuations. One last thing. Most of those companies are selling everything franticaly because there is stigma attached to the paper and as long as they have it on their books their peers have no confidence in the company and will not lend any money to the institution. Goverment will not need to borrow from private banks in this case. That's why goverment can buy and hold this paper for a long time. And buying and holding the instruments till everyone really knows what they are worth might pay off big time.