The Enactment of FIRREA and the Beginnings of the RTC

To help remedy the thrift industry's problems and restore the public's flagging confidence, Congress passed the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA, P.L. 101-73 ). The vehicle created by FIRREA to conduct the cleanup was the Resolution Trust Corporation (RTC). Principal funding for the RTC came from an off-budget entity, the Resolution Funding Corporation (REFCORP), a FIRREA-created public-private partnership, which was apart from but was operated by the Federal Home Loan Bank (FHLB) System, a federal entity that supplies credit reserves to thrift institutions (similar to what the Federal Reserve does for commercial banks). Subsequent legislation increased RTC's funding, which would eventually total about $105.1 billion. While the strategy employed a number of different structures, all of the equity partnerships involved a private sector partner acquiring a partial interest in a pool of assets, controlling the management and sale of the assets in the pool, and making distributions to the RTC based on the RTC's retained equity interest. Initially, the CMBS were reportedly difficult to sell due in part to the fact that the huge losses that had occurred in the value of commercial mortgages was a major factor in the thrifts' troubles. It was also responsible for selling more than $450 billion of their real estate and disposing of 95% of their overall assets with a recovery rate of more than 85%.
In a 1989 legislative response to financial troubles in the thrift industry, the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA, P.L. 101-73) was enacted: FIRREA's principal mission was to conduct a partially tax-payer funded program to address the troubles of the nation's many insolvent thrifts. To do so, it established a new entity, the Resolution Trust Corporation (RTC), whose mission was to address troubled thrifts by arranging their sale to other institutions or shuttering them and disposing of their assets. The RTC would eventually obtain $105 billion in funding but a major part of its principal funding came from an off-budget entity, the Resolution Funding Corporation (REFCORP). REFCORP was created by FIRREA as a public-private partnership, which acquired the funds that it would provide to the RTC through proceeds from its sale of U.S. Treasury bonds. During its years of operation, 1989 to 1995, the RTC was alternately criticized for dumping thrift assets and for taking too much time to dispose of them. It subsequently began selling block assets, it partnered with private entities in the joint ownership of some assets, and it issued securities backed by commercial mortgages. When shut down in 1995, the RTC had closed 747 insolvent thrifts and recovered about 85% of the value of the assets it had seized. Estimates vary but several observers cite direct and indirect governmental costs totaling about $150 billion for the undertaking.