RTC Oversight Board President and Senior Vice President, Peter Monroe and Lloyd Chaisson, Issued the Following Statement Today
TAMPA, Fla., Sept. 23 /PRNewswire/ -- "The RTC (Resolution Trust
Corporation) was created in 1989 by Congress as a federal agency to close
failed Savings and Loan Associations and sell their assets at the highest
value. Proceeds from sales were used, along with Congressional
appropriations to pay all obligations to federally insured depositors
Thousands of Savings and Loan (S & L) executives and directors were
convicted. No S & L shareholder received a penny of taxpayer dollars.
Innovative techniques such as the securitization of commercial mortgages
were created to achieve the highest "net present value" for all assets
sold. RTC was never a "bailout" in the sense of going beyond explicit
federal guarantees. When the job was done, the RTC closed its
doors-forever.
In 1993, it was thought that higher capital standards for all financial
institutions, tighter asset appraisals and the experience of the S&L crisis
itself would help prevent a reoccurrence of a financial crisis caused by
mortgage defaults. Now we find ourselves, yet again, mired in a
mortgage-driven crisis. However this one, if not soundly managed, could
saddle future generations with unprecedented debt.
We offer this discussion of "lessons learned" from our RTC Oversight
Board leadership roles in the spirit of "those who do not understand
history are doomed to repeat it". At the same time, much of the work of the
RTC should be repeated. We caution officials not to act so precipitously as
to replace the last 20 years of government paralysis with panic.
Notwithstanding the extreme nature of the current financial crisis, "doing
it right" is the most important thing that can be done. If Treasury and
Congress get this wrong because of unbridled haste to "do something", the
implications are far more serious than anyone can imagine. It will take
years to unwind any poor decision making.
We believe that the following ten principles must guide the current
federal response:
1) Assets purchased from financial institutions must be sold in a manner
to achieve the highest net present value (NPV). A tendency of
Congress during the RTC era was to focus on quick cash sales versus
techniques that yielded the highest overall return. At the same time,
assets must be sold as expeditiously as possible and in a manner that
does not disrupt markets.
2) Shareholders of financial institutions must not be "bailed out" --
they took risks to achieve high returns and therefore must suffer the
full economic consequences of their actions.
3) All transactions must be transparent and open to public scrutiny,
including disclosure via the internet. The government must employ
purchase and sales techniques that are understandable by the public
and Congress. Full disclosure by the selling institution is
paramount. We propose that the CEO and CFO of the selling institution
must declare, under oath (similar to Sarbanes Oxley), that they have
provided the government complete and accurate due diligence on each
asset that they offer for sale to the Government. Our economy got into
this mess because Wall Street "rocket scientists" were "too clever by
half". Let's eliminate the "clever" and focus on the "understandable".
For example, an asset purchase by the Government through "a reverse
auction" is not a good idea. This esoteric method, intended primarily
for commodities, will be understood by very few, opening up
opportunities for fraud and misrepresentation.
4) Program rules must not be conflicting. The RTC was asked to maximize
NPV, but also protect environmentally sensitive assets, create
affordable housing and achieve other goals, which although laudable,
conflicted with achieving NPV.
5) These "non-NPV" goals should be achieved in parallel legislation. For
example, a crucial program to prevent foreclosures should be adopted
that is parallel, but not intertwined with the asset purchase program.
The cost of these programs must be separately appropriated and fully
disclosed.
6) There should be an Oversight Board as a check and balance to the
operating entity -- and we would strongly urge that an independent
agency be created. Treasury should be focusing on a new regulatory
scheme, rather than asset acquisition and disposition. No one agency
should have absolute policy and program authority. That is far too
risky for a $700 billion program. The Oversight Board should be
comprised of both government and private industry leaders. There
should not be two governing boards-a problem that plagued the S & L
cleanup.
7) The private sector must be must be employed, whenever possible, to
help maximize asset sale NPV, subject to stringent government rules
and oversight. Examples of free market programs used by the RTC
included: retaining private entities to manage and dispose of assets,
use of forward (not reverse) auctions and commercial mortgage
securitization (as presented to Congress by the Oversight Board) --
all of which increased projected sales proceeds by $60 billion, and
reduced taxpayers' losses by the same.
8) Understandable and published metrics are critical. Officials must
create a scorecard and publish it -- measuring both the good and the
bad. Ongoing measurement of recovery rates on assets, taxpayer losses,
and the restoration of market stability is essential. An independent
Inspector General should also be established to test internal
controls, suggest program improvements, and investigate potential
corruption.
9) Many assets may remain virtually unsaleable due to the absence of
documentation or physical condition. Tools such as seller financing
must be considered, even if it means that the Government has a
continuing interest for a longer time period. It is far better to put
these assets into private hands than to have them languish on a
Government balance sheet or in the hands of vandals. They will not
improve with age.
10) Based on our experience at the FHA, one of the world's largest
insurance entities, we have three insurance suggestions --
(i) Ensure continuity of lending by financial institutions with
sufficient capital at risk to guarantee improved underwriting;
-- This must be reconciled with the reality that some banks
will lose all of their capital due to their incurred asset
losses;
(ii) Verify that insurance underwriting of money market accounts
fully covers all risks. Non-bank money market funds have
higher risk profiles than banks. Therefore, their risk
premiums, to be actuarially sound, must be greater than the
premiums paid by banks to the FDIC; and,
(iii) Structure the insurance of money market funds to achieve a
level playing field between money funds and banks -- to avoid
funds flight from banks. FNMA and Freddie Mac had an unfair
competitive advantage over banks because of the free "implicit
Federal guarantee" that was recently made explicit by the
federal government -- exposing the taxpayers to hundreds of
billions of liabilities."
Peter Monroe was President of the RTC Oversight Board (from 1990 to
1993) and is currently President and CEO of Wilherst Oxford Venture Capital
LLC. He was also chief operating officer of the FHA, immediately prior to
the RTC.
Lloyd Chaisson was Senior Vice President of the RTC Oversight Board and
is currently a management consultant, formerly with McKinsey and Company.
He also held a position as senior advisor to the HUD Secretary immediately
prior to the RTC.
Peter Monroe
727-643-6303
pmonroe@wilherst.com
SOURCE Resolution Trust Corporation
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