Little Credit for RTC at End of S&L; Crisis

Almost unnoticed amid all the other good news pushing interest rates down and stocks up is the fact that the savings and loan crisis is coming to an end at less cost than was feared a few years ago.

The Resolution Trust Corp., the government bailout agency set up in 1989, may go out of existence in September, having sold off more than $300 billion in real estate, bad loans and other properties from failed S&Ls.;

Its end will disappoint exaggerated fears. The RTC was once the country’s largest employer of lawyers, accountants, appraisers and real estate brokers. There were predictions it would still be around in our grandchildren’s time--but it won’t. And the total direct cost to the taxpayer for disposing of S&L; properties will come to about $125 billion, not counting interest--less than projections of $160 billion made two years ago by government experts.


That’s good news in more ways than one. The disposal of S&L; properties means that a realistic market for commercial real estate can re-emerge. And that in turn means increased credit should be available for small business, because real estate is the main collateral for small-company loans. And the Clinton Administration won’t have to borrow tens of billions of dollars for years to come to replenish S&L; deposit accounts.

The envisioned end of the crisis is one more factor encouraging investors these days. Like the announcement Tuesday from the Labor Department that U.S. productivity gains last year were the best since 1972, the S&L; news is part of a new spirit of realism in the economy that is cheering the markets as much as any technical factor.

To be sure, all is not neat and clean. Even the best estimate of RTC Chairman Albert V. Casey is that his agency will leave up to $60 billion in bad S&L; assets for the Federal Deposit Insurance Corp. to handle.

RTC also leaves behind bitter criticism that it was too quick to sell off assets at fire sale prices to big investor groups and too harsh in liquidating troubled S&Ls.;

But criticism is to be expected. While RTC made its share of mistakes, to have dealt with the largest real estate debacle in the nation’s history in so short a time “indicates a pretty good job,” says James F. Montgomery, chairman of Chatsworth-based Great Western Financial Corp., holding company of one of the nation’s largest and most solvent S&Ls.;

Like any great disaster, the S&L; experience holds lessons for all business. The biggest lesson: Use common sense.

The S&L; crisis began in the 1970s when interest rates were deregulated so savers could keep up with inflation by earning more on certificates of deposit, with $100,000 per type of account fully protected by the FDIC. But when deposit rates soared higher than rates on mortgage loans held as assets, the S&Ls; were threatened with bankruptcy. Common sense might have dictated direct aid from government for the old mortgages and a switch to adjustable rates for new loans.

But Congress tried to avoid reality and said S&Ls; should overcome their difficulties by going beyond home loans to more adventurous commercial lending.

The result was a real estate boom and a thieves’ carnival. Shopping centers, apartment buildings, hotels and office buildings went up with abandon. In Arizona, Charles H. Keating Jr.--now in jail--built palatial resort hotels; in Beverly Hills, Michael Milken--now out of jail--used S&L; money to finance takeover deals.

When the bubble burst in the late 1980s, more than 700 S&Ls; were insolvent and hundreds of billions in property values had been lost by savings institutions, developers, insurance companies and investors.

So the government stepped in and formed the RTC, but still common sense took awhile. In its early days, the bailout agency tried to carefully arrange pieces of real estate for sale. The work was slow and costly, and the agency often got taken to the cleaners.

So in the last two years, the RTC has hastened its own demise by aggressive auctions of real estate and loan packages to Wall Street and major financial companies such as GE Credit. Last year, it received $79 billion, or 86% of a total of assets listed at $92 billion.

“That’s the way to do it,” says Martin Mayer, author and banking expert. “It’s quick, the sales establish a market rate of return and reduce public expenses.”

Even now we’re not out of the woods. A 13-year supply of office buildings chills commercial markets. And more S&Ls--and; banks--will fail in the future simply because there are more institutions than the market can support.

But disaster won’t recur. S&Ls; have wised up and no longer hold mortgages, but pass them through to government-backed mortgage securities. And surviving S&Ls; have regained their common sense and gone back to traditional home loans.

What’s different today is that there are fewer illusions and more determination. Few Americans believe that they’ll get rich quick, but they do believe that the federal deficit is real and should be cut. That’s why interest rates are going down and stock prices are going up.