Would a Resolution Trust Corp.-type solution work?
The agency created in the late 1980s to end the S&L crisis had a different kind of mess to clean up.
Bankers, politicians and economists grasping for ways to address the financial crisis are rallying behind a solution with its roots in the savings and loan debacle of the 1980s -- the creation of a single government agency to buy up billions in bad bank debt and other assets.
The idea, which is gathering steam almost as fast as some of Wall Street's leading institutions have collapsed, is to create a relief agency along the lines of the Resolution Trust Corp. That was the institution created by Congress in 1989 to sell off the assets of failed thrifts.
The proposal's backers include former Federal Reserve Chairman Paul A. Volcker and former Treasury Secretary Nicholas F. Brady. A news report that Treasury Secretary Henry M. Paulson may propose creating such an agency may have contributed to Thursday's powerful rally on Wall Street, on the heels of the big sell-off the day before.
Late Thursday, Paulson and Federal Reserve Chairman Ben S. Bernanke met with congressional leaders to outline the government's options, and a formal plan is expected to be submitted to Congress soon.
Whatever form it takes, there is a growing consensus that the government needs a unified plan to address the credit crisis -- instead of what Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, has branded "a pattern of ad hoc interventions."
This week's bailout of insurance giant American International Group Inc., for example, was crafted at the last minute in an atmosphere of impending catastrophe, as were the earlier rescues of investment bank Bear Stearns Cos. and mortgage giants Fannie Mae and Freddie Mac.
"There's so much bad paper out there that it's clogging the system," Frank said in a televised interview this week. "Somebody has to step in and take it off. . . . If that's the case, is there anybody other than the federal government that can do it? No one that I know of has come up with the answer yet."
Volcker and Brady, along with former Comptroller of the Currency Eugene A. Ludwig, asserted in an opinion piece in the Wall Street Journal on Wednesday that a government agency tasked with buying bad debt would serve several purposes in the current crisis.
It would restore liquidity to the financial system by buying securities that are "effectively not trading," the former regulators said. By holding the paper for longer than could the banks or the Federal Reserve, it could wait for markets to recover and possibly get a better price than the owners would receive in a fire sale today.
