Recently Chartered Banks’ Vulnerability
 

to Real Estate Crisis 

by Chiwon Yom* 

Even while the U.S. banking industry continues 

to consolidate and the number of banks continues 

to shrink, de novo banking activity remains vigorous. De novo banks play important roles in preserving competition in the market, providing 

credit to small businesses (DeYoung, Goldberg, 

and White [2000]), and promoting an entrepreneurial spirit (Brislin and Santomero [1991]).1 

At the same time, however, these fledgling institutions are financially fragile and more susceptible 

to failure. Although they are sound in their early 

years, with large capital cushions and low levels of 

nonperforming loans, their financial condition 

typically deteriorates as capital reserves and the 

quality of their loans move toward industry levels 

but earnings remain low. Furthermore—and this 

may not be widely known—new banks are vulnerable to real estate crises because they concentrate heavily in real estate loans. The extent of 

new banks’ exposure to the real estate market is 

reflected in their poor ratings on the Real Estate 

Stress Test (REST). This model measures the 

severity of a bank’s exposure to real estate lending, projecting what would happen to a bank if 

the real estate market experienced a downturn 

similar to the New England real estate crisis in 

the 1990s.2 

The FDIC closely monitors recently chartered 

banks and thrifts. For purposes of offsite monitoring, the FDIC defines young banks as commercial 

banks and thrifts that are eight years old or 

younger based on studies showing that new banks 

need more than three years to fully mature 

(DeYoung [2000], DeYoung and Hasan [1998]). 

Newly chartered banks tend to be small, and 

roughly 80 percent of all young banks are located 

in metropolitan statistical areas (MSAs). This 

study examines these young banks. Specifically, it 

examines the vulnerability of these young banks 

to real estate problems: how their financial condition evolves over time, the degree of risk they 

bear because of their real estate lending, how they 

* The author is a senior financial economist in the Division of Insurance and 

Research at the Federal Deposit Insurance Corporation. The author would 

like to thank Daniel A. Nuxoll, George Hanc, Kenneth Jones, Valentine V. 

Craig and Christine E. Blair for valuable comments and suggestions. 

1 In this article, the terms banks and institutions refer to all insured institutions—commercial banks, savings banks and thrifts. 

2 See Collier, Forbush, and Nuxoll (2003). The stress test was developed on 

the basis of the New England real estate crisis in the 1990s, and information 

from a bank’s balance sheet and income statement are used to rate the 

institution. The REST ratings are directly comparable to CAMELS ratings; a 

REST rating of 1 indicates least vulnerable to a real estate crisis, and a rating of 5 indicates most vulnerable. The REST model is part of the FDIC’s 

offsite monitoring system and is used to help identify and monitor the institutions that are most vulnerable to a real estate crisis. 

FDIC BANKING REVIEW 1 2005, VOLUME 17, NO. 2 
Recently Chartered Banks’ Vulnerability to Real Estate Crisis 

compare with established banks in this respect, 

and what explains the heightened vulnerability of 

young banks to real estate crises. 

For our benchmark group we choose small established banks, defined for this study as institutions 

that are more than eight years old, have assets of 

less than $300 million, and are located in MSAs. 

In addition, our benchmark group excludes special-purpose institutions, such as credit card banks 

and banks with extensive trust operations. 

This study is preceded by a review of the literature and followed by a summary and conclusion. 

The Purpose of This Study in Relation 

to the Literature 

Recent studies have furthered our understanding 

of newly established banks by examining the 

determinants of bank start-ups and identifying the 

factors that determine the performance of de 

novo banks. De novo banking activity is more 

likely during periods of favorable economic conditions (Dunham [1989]) and in areas that have 

undergone merger activity (Dunham [1989], Berger, Bonime, Goldberg, and White [1999], Seelig 

and Critchfield [2003]). Moreover, new banks 

tend to locate in urban areas (DeYoung [2000]) 

and in markets where economic growth is high 

(Moore and Skelton [1998]). 

Among researchers who identify the factors that 

determine the performance of de novo banks, 

DeYoung (2003) finds that the relationship 

between external conditions (for example, intense 

competitive rivalry or slow economic growth) and 

higher failure rates is more systematic for the de 

novo banks than for established banks. Hunter, 

Verbrugge, and Whidbee (1996) find that adverse 

economic conditions have contributed to the failure of recently chartered thrifts. 

Endogenous factors have also been found to play 

a significant role in the performance and survival 

of newly chartered banks. Hunter, Verbrugge, 

and Whidbee (1996) find that credit risk, low 

capital stocks, and cost inefficiencies have contributed to the failure of de novo banks. Hunter 

and Srinivasan (1990) find that differences in 

operating costs, credit policy, and leverage 

account for most of the performance variations 

among the sample banks relative to the established target group during the early years of operation. Arshadi and Lawrence (1987) find that 

operating costs, deposit growth, composition of 

loan portfolios, and deposit pricing are important 

in determining the performance of newly chartered banks; they conclude that the performance 

of new banks is a function of endogenous factors. 

Other studies relate the performance of de novo 

banks to the banks’ business strategies and risk 

management. Brislin and Santomero (1991) find 

that de novo banks in the third Federal Reserve 

district (Pennsylvania, New Jersey, and Delaware) 

tend to concentrate in single types of loans—for 

example, real estate loans—and they caution that 

because of the lack of diversification, such strategies increase portfolio risks. Gunther (1990) 

attributes the large number of failures of new 

Texas banks in the 1980s to the banks’ aggressive 

strategies, such as concentrating in commercial 

and industrial (C&I) loans, maintaining low liquidity, and relying heavily on purchased funds. 

Hunter and Srinivasan (1990) find that real 

estate lending has consistent and significant 

effects on the performance of new banks in the 

later years of operation. 

The present study adds to the literature by exploring the role of real estate lending in relation to 

the performance and lending strategies of banks 

established between 1995 and 2003. In the latter 

half of the 1990s, after severe problems in the 

banking industry during the 1980s and early 

1990s, de novo banking activity picked up. Table 

1 reports the number of banks and savings institutions chartered in the United States between 

1995 and 2003 that were not affiliates of a holding company.3 The table disaggregates de novo 

institutions by state and type of charter (national 

bank charter, state bank charter, and savings 

institution charter). During this period, the five 

3 I thank Tim Critchfield at the FDIC’s Division of Insurance and Research for 

providing these data. 

2005, VOLUME 17, NO. 2 2 FDIC BANKING REVIEW 
Recently Chartered Banks’ Vulnerability to Real Estate Crisis 

Table 1 states with the highest number of new start-ups 

De Novo Institutions by Statea 

(1) (2) (3) (4) 

National Bank State Bank Savings 

State Charters Charters Institutions 

(5) 

Total 

AL 2 14 — 

AR 2 15 2 

AZ 2 17 — 

CA 28 54 3 

CO 3 22 1 

CT 2 11 6 

DC 1 — — 

DE 2 3 2 

FL 18 86 17 

GA 32 61 3 

IA 3 9 1 

ID — 6 1 

IL 4 69 8 

IN 3 10 3 

KS 8 9 2 

KY 12 27 3 

LA 2 16 — 

MA 2 2 1 

MD 3 6 5 

ME — 2 — 

MI — 26 1 

MN 6 29 3 

MO 7 25 4 

MS 2 8 —­

MT 1 1 1 

NC 2 38 3 

NE 2 — — 

NH — 2 1 

NJ 5 30 6 

NM 1 8 — 

NV 3 18 1 

NY 4 14 4 

OH 7 12 7 

OK 5 4 2 

OR —­ 16 1 

PA 1 27 7 

RI 1 1 1 

SC 12 8 4 

SD 4 —­ — 

TN 5 38 3 

TX 36 20 8 

UT —­ 26 1 

VA 14 19 1 

VI —­ 2 — 

WA 7 31 3 

WI 2 21 5 

WV —­ 11 — 

WY 1 3 — 

Total 257 877 125 

Percent 20.4 69.7 9.9 

16 

19 

19 

85 

26 

19 

1 

7 

121 

96 

13 

7 

81 

16 

19 

42 

18 

5 

14 

2 

27 

38 

36 

10 

3 

43 

2 

3 

41 

9 

22 

22 

26 

11 

17 

35 

3 

24 

4 

46 

64 

27 

34 

2 

41 

28 

11 

4 

1259 

100.0 

a De Novo institutions chartered between 1995 and 2003. 

were Florida, Georgia, Illinois, California, and 

Texas at 121, 96, 81, 85, and 64, respectively. 

State charters, at 877, constituted the largest 

share of new institutions (69.7 percent); there 

were 257 national charters (20.4 percent) and 

125 new savings institutions (9.9 percent). 

For a number of reasons, this new batch of de 

novo institutions may differ in performance and 

viability from the de novo banks in the 1980s. 

First, economic conditions are more favorable 

now than they were in the 1980s, when many 

banking institutions operated under severe 

regional recessions. Second, regulation and 

supervision are more stringent now. The Federal 

Deposit Insurance Corporation Improvement Act 

of 1991 (FDICIA) requires all institutions, 

including those with national charters, to apply 

formally to the FDIC for federal deposit insurance. Before FDICIA, the FDIC granted deposit 

insurance to national banks as a matter of law 

once the Office of the Comptroller of the Currency had approved a bank’s charter. In contrast, the 

chartering of state banks depended heavily on 

whether the FDIC approved the bank’s application for insurance: without the FDIC’s approval of 

the application, a state was unlikely to grant a 

bank charter. 

Third, once chartered, a new bank is now supervised more closely by its regulatory agency. The 

FDIC conducts a limited-scope examination at 

each newly chartered state nonmember bank 

within the first six months of operation, followed 

by a full-scope examination within the first 

twelve months. Subsequently, each state nonmember bank is examined each year until the end 

of the third year, although the FDIC may alternate with the state supervisors in conducting the 

examination.4 Similarly, the Federal Reserve 

Banks examine newly chartered state member 

banks at a higher frequency compared to established banks, conducting full-scope examinations 

for safety and soundness at newly chartered state 

4 I thank Don Hamm at the FDIC’s Division of Supervision and Consumer Protection for referring me to the Manual of Examination Policies, Section 1.1 

Basic Examination Concepts and Guidelines. 

FDIC BANKING REVIEW 3 2005, VOLUME 17, NO. 2 
 

Recently Chartered Banks’ Vulnerability to Real Estate Crisis 

member banks at 6-month intervals (whereas 

established banks are examined every 12 to 18 

months) and continuing to schedule exams at this 

frequency until the bank receives a strong composite CAMELS ratings (a rating of 1 or 2) in 

two consecutive exams (DeYoung [2000]).5 

Fourth, new banks are required to maintain a 

higher capital ratio than their established counterparts. Normally the FDIC requires all proposed 

depository institutions to start with enough capital to provide “a Tier 1 capital to assets leverage 

ratio (as defined in the appropriate capital regulation of the institution’s primary federal regulator) 

of not less than 8.0% throughout the first three 

years of operation.”6 These temporary capital 

requirements are meant to ensure that new banks 

have enough capital cushion to absorb the negative earnings and rapid asset growth of the first 

few years. 

Finally, bank supervisors typically place restrictions on dividend payouts by new banks, limit the 

amount of debt that new bank holding companies 

can issue, and require new banks to maintain 

minimum levels of loan-loss reserves (DeYoung 

[2000]). 

The Life Cycle of the Performance of 

Young Banks 

We begin our examination of young banks’ exposure to the real estate market by describing the 

evolution of the performance of young banks. To 

document this evolution, we group young banks 

chartered between 1995 and 2003 into classes 

according to the year they are chartered. For 

example, new banks chartered in 1997 and 1998 

are grouped into Class 1997 and Class 1998. 

Grouping young banks this way is motivated by 

recent studies that have found that newly chartered banks follow a distinct life-cycle pattern 

(DeYoung [1999, 2000]). 

Figures 1 through 5 graph the median values of 

financial ratios for each of our classes of young 

banks, starting when the banks are four quarters 

old (the flow variables are four-quarter sums). For 

each ratio, the financial performance of all the 

classes of young banks is compared with the median 2—the median financial ratio of all institutions with a CAMELS composite rating of 

2—serving as an industry benchmark. 

The figures show that in the early years of young 

banks, the banks’ financial ratios follow similar 

time paths regardless of the year of chartering. 

Figure 1 shows that the median bank of each class 

earned negative profits in the first few years. But 

although the median banks start to earn profits 

after about two years, they continue to underperform established banks (the median 2). In the 

early years, however, young banks’ negative or 

low earnings are offset by a large initial capital 

and low nonperforming assets: as figures 2 and 3 

show, in the first few years young banks have very 

high capital and very few nonperforming loans. 

For instance, in their fourth quarter since establishment, the median equity-to-assets ratios for 

Class 1995, Class 1998, and Class 2000 are 17.40 

percent, 18.46 percent, and 18.77 percent, respectively. This is substantially higher than the median 2 equity-to-assets ratio of 8.96 percent. 

Similarly, the median nonaccruing-loans-to-totalassets ratio is zero for all classes of young banks in 

their fourth quarter, compared with 0.24 percent 

for the median 2. A number of years after having 

been chartered, however, young banks experience 

financial deterioration, as their capital cushions 

are depleted by low earnings and fast growth. Figure 4 shows that the median asset growth (annualized) of young banks is very high in the first few 

years. 

But as the rapid rise in nonaccrual loans indicates, assets begin to show signs of trouble. 

Notably, young banks’ performance begins to 

deteriorate for the most part after the third year 

(12th quarter), the age when supervisors stop paying close attention to these institutions. The 

5 CAMELS is an acronym for Capital, Asset quality, Management, Earnings,
 

Liquidity, and market Sensitivity.
 

6 The FDIC Statement of Policy on Applications for Deposit Insurance.
 

2005, VOLUME 17, NO. 2 4 FDIC BANKING REVIEW 
Recently Chartered Banks’ Vulnerability to Real Estate Crisis 

Figure 1 

Median Income before Taxes 

Percent of Total Assets 

2 

1 

0 

-1 

-2 

Young 1995 

Young 1996 

Young 1997 

Young 1998 

Young 1999 

Young 2000 

Young 2001 

Young 2002 

Young 2003 

Median 2 

-3 

-4 

4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 

Age (in quarters) 

Figure 2 

Median Equity-to-Asset Ratios 

Percent of Total Assets 

25 

Young 1995 Young 2000 20 Young 1996 Young 2001 

Young 1997 Young 2002 

Young 1998 Young 2003 

15 Young 1999 Median 2 

10 

5 

0 

4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 

Age (in quarters) 

poor performance continues for a number of years 

until these banks reach full maturity and perform 

much like established banks. Young banks’ 

reliance on noncore funds, too, remains high up 

to the eighth year. Figure 5 shows that throughout the sample period, young banks have a higher 

median ratio of noncore-funds-to-total-assets than 

the median 2. 

Figure 3 

Median Nonaccruals 

Percent of Total Assets 

0.4 

Young 1995 Young 2000 

Young 1996 Young 2001 

Young 1997 Young 2002 

0.3 Young 1998 

Young 1999 

Young 2003 

Median 2 

0.2 

0.1 

0 

4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 

Age (in quarters) 

Figure 4 

Median Asset Growth Rates 

Growth rate (percent) 

250 

Young 1995 Young 2000 

200 Young 1996 Young 2001 

Young 1997 Young 2002 

Young 1998 Young 2003 

Young 1999 Median 2 

150 

100 

50 

0 

5 7 9 11 13 15 17 19 21 23 25 27 29 31 

Age (in quarters) 

These findings are consistent with those of studies 

that examined the performance trend of new 

banks chartered in the 1980s. Using the sample 

of new banks chartered between 1980 and 1985, 

DeYoung and Hasan (1998), and DeYoung 

(2000), conclude that it takes many years for de 

novo banks to reach full maturity and perform as 

well as established banks. In fact, DeYoung and 

Hasan (1998) find that it takes nine years for new 

FDIC BANKING REVIEW 5 2005, VOLUME 17, NO. 2 
 

Recently Chartered Banks’ Vulnerability to Real Estate Crisis 

Figure 5 Figure 6 

Median Noncore Funds 

Percent of Total Assets 

30 

25 

20 

15 

Young 1995 Young 2000 

Young 1996 Young 2001 10 Young 1997 Young 2002 

Young 1998 Young 2003 

Young 1999 Median 2 5 

0 

4 6 8 10 12 14 16 18 20 22 24 26 28 

Age (in quarters) 

30 32 

Median REST Ratings of Young and 

Established Institutions 

REST Rating 

5 

4 Young Banks 

3 

2 

Established Banks 

1 

0 

3/86 3/88 3/90 3/92 3/94 3/96 3/98 3/00 3/02 3/04 

banks to become as efficient, in terms of profitability, as established banks. 

The Real Estate Exposure of Young Banks 

Compared with That of Established Banks 

We have seen that young banks are financially 

fragile. This is well known. What is less well 

known is that they concentrate heavily in risky 

assets—more heavily than established banks do. 

Table 2 reports the median REST ratings of young 

and established banks across time and the number 

of banks in each of the two groups, and figure 6 

represents the two “median” columns graphically. 

As figure 6 shows, the median REST ratings of 

young banks are consistently worse than those of 

established banks. A formal test using Kendall’s 

rank correlation confirms that the REST ratings 

of young banks are worse (with statistical significance) than those of established banks. Like 

Pearson’s correlation coefficient, Kendall’s rank 

correlation takes values between –1 (perfect negative correlation) and +1 (perfect positive correlation). Moreover, figure 6 shows that the REST 

ratings of both young and established banks 

steadily worsened in the latter half of the sample 

period—yet the gap between the median ratings 

widened. It can be inferred, therefore, that the 

REST ratings of young banks deteriorated more 

rapidly than those of established banks. 

Figures 7 and 8, whose solid lines trace the percentage of young and established banks with poor 

REST ratings over time, show the percentages of 

both young and established banks with REST ratings of 4 or 5 rose between 1993 and 2004, but at 

the same time, the percentage of young banks 

with poor ratings became higher. It rose from 21 

percent in 1993 to 77 percent in 2004, whereas 

the percentage for established banks with poor 

ratings rose from 8 percent in 1993 to 40 percent 

in 2004. These figures show the extent to which 

young banks are more vulnerable to the stress of a 

real estate crisis than their established counterparts are. 

(Parenthetically, figures 7 and 8 also trace the 

percentage of young and established banks with 

poor CAMELS composite ratings. The broken 

lines in these figures show the percentage of 

banks with a CAMELS rating of 4 or 5. During 

the period 1993–2004, when the percentage of 

institutions with poor REST was rising, the percentage of institutions with poor exam ratings was 

falling. The contrast between the trend in the 

health of the banking industry and the trend in 

the industry’s risk exposures to real estate lending 

2005, VOLUME 17, NO. 2 6 FDIC BANKING REVIEW 
Recently Chartered Banks’ Vulnerability to Real Estate Crisis 

Table 2 

Comparison of Median REST Ratings for Young and Established Institutions 

Young Banks Established Banks Young Banks Established Banks 

Date Number Median Number Median Date Number Median Number Median 

(1) (2) (3) (4) (5) (1) (2) (3) (4) (5) 

Mar-86 84 4.11***a 5465 2.62 Mar-96 496 2.90*** 3792 2.19 

Jun-86 169 3.95*** 5386 2.58 Jun-96 461 3.02*** 3748 2.26 

Sep-86 267 3.96*** 5369 2.59 Sep-96 435 3.14*** 3688 2.34 

Dec-86 346 3.79*** 5219 2.54 Dec-96 414 3.16*** 3623 2.38 

Mar-87 410 3.66*** 5137 2.47 Mar-97 402 3.12*** 3566 2.32 

Jun-87 473 3.57*** 5037 2.41 Jun-97 384 3.18*** 3521 2.33 

Sep-87 527 3.45*** 4978 2.38 Sep-97 378 3.14*** 3466 2.37 

Dec-87 569 3.38*** 4898 2.37 Dec-97 383 3.36*** 3401 2.40 

Mar-88 607 3.35*** 4833 2.33 Mar-98 378 3.31*** 3332 2.43 

Jun-88 638 3.25*** 4732 2.32 Jun-98 386 3.36*** 3263 2.45 

Sep-88 676 3.16*** 4636 2.34 Sep-98 400 3.50*** 3214 2.54 

Dec-88 708 3.16*** 4503 2.32 Dec-98 409 3.44*** 3134 2.50 

Mar-89 732 3.12*** 4431 2.33 Mar-99 429 3.58*** 3085 2.51 

Jun-89 766 3.12*** 4389 2.33 Jun-99 447 3.86*** 3025 2.68 

Sep-89 798 3.16*** 4302 2.38 Sep-99 472 3.74*** 2971 2.67 

Dec-89 837 3.30*** 4235 2.40 Dec-99 514 3.74*** 2904 2.67 

Mar-90 860 3.20*** 4163 2.41 Mar-00 533 3.93*** 2849 2.72 

Jun-90 894 3.37*** 4079 2.43 Jun-00 575 3.87*** 2801 2.82 

Sep-90 922 3.31*** 4009 2.45 Sep-00 625 3.85*** 2739 2.76 

Dec-90 960 3.32*** 3953 2.42 Dec-00 679 3.97*** 2664 2.84 

Mar-91 990 3.23*** 3899 2.42 Mar-01 727 4.02*** 2591 2.85 

Jun-91 1019 3.24*** 3829 2.40 Jun-01 773 4.00*** 2548 2.81 

Sep-91 1041 3.10*** 3759 2.37 Sep-01 824 4.05*** 2508 2.91 

Dec-91 1048 2.97*** 4781 2.32 Dec-01 860 4.49*** 2434 2.87 

Mar-92 1008 2.86*** 4702 2.24 Mar-02 897 4.43*** 2388 2.86 

Jun-92 977 2.81*** 4676 2.22 Jun-02 882 4.36*** 2325 2.90 

Sep-92 938 2.82*** 4652 2.20 Sep-02 902 4.21*** 2265 2.82 

Dec-92 916 2.70*** 4567 2.13 Dec-02 937 4.26*** 2222 2.75 

Mar-93 879 2.67*** 4541 2.13 Mar-03 943 4.09*** 2184 2.69 

Jun-93 841 2.67*** 4497 2.14 Jun-03 942 4.26*** 2144 2.82 

Sep-93 815 2.65*** 4431 2.13 Sep-03 947 4.13*** 2125 2.75 

Dec-93 770 2.66*** 4348 2.11 Dec-03 939 4.06*** 2100 2.70 

Mar-94 737 2.69*** 4286 2.09 Mar-04 931 4.34*** 2066 2.75 

Jun-94 699 2.70*** 4234 2.12 Jun-04 930 4.39*** 2032 2.85 

Sep-94 662 2.74*** 4172 2.15 Sep-04 915 4.35*** 2018 2.81 

Dec-94 635 2.79*** 4123 2.15 Dec-04 905 4.54*** 2002 3.03 

Mar-95 608 2.86*** 4034 2.17 

Jun-95 586 2.88*** 3965 2.18 

Sep-95 553 2.87*** 3899 2.22 

Dec-95 517 2.94*** 3852 2.23 

a Based on Kendall’s rank correlation test.
 

*** Indicates statistical signfifcance at the 1 percent level.
 

is consistent with the high cyclicality of the real 

estate market. During periods of favorable economic conditions, the real estate market expands, 

and meeting the increasing demand for real estate 

loans leads banks to large exposures.) 

The reason the REST ratings of young banks are 

worse than the ratings of established banks is that 

the kinds of real estate lending done by young 

banks are riskier than the kinds done by established banks. Table 3 shows that as of December 

2004, young banks tended to have more commercial and industrial (C&I), construction and development (C&D), and nonresidential real estate 

loans—the three types generally considered risky. 

Specifically, the new institutions’ median ratio of 

C&I loans to total assets was roughly twice that 

of the established peer: young banks’ 11.85 percent versus established banks’ 6.59 percent. Similarly, nonresidential real estate lending made up a 

FDIC BANKING REVIEW 7 2005, VOLUME 17, NO. 2 
b

Recently Chartered Banks’ Vulnerability to Real Estate Crisis 

Figure 7 Figure 8 

3/86 3/88 3/90 3/92 3/94 3/96 3/98 3/00 3/02 3/04 

0 

20 

40 

60 

80 

Percent 

CAMELS rating 

REST rating 

Percentage of Young Banks 

Rated 4 or Worse 

3/86 3/88 3/90 3/92 3/94 3/96 3/98 3/00 3/02 3/04 

0 

20 

40 

60 

80 

Percent 

CAMELS rating 

REST rating 

Percentage of Established Banks 

Rated 4 or Worse 

higher percentage of total assets for new institutions than for established banks. And most 

importantly, a typical new bank had 8.58 percent 

of total assets in construction loans—more than 

twice the percentage for the established peer. 

Previous studies have found construction and 

development lending to be the primary risk factor 

of real estate crises because the success of construction loans is highly dependent on the future 

of the real estate market (Collier, Forbush, and 

Nuxoll [2003]) and because commercial real 

estate projects are highly leveraged and more sensitive to changes in market conditions (Freund, 

Curry, Hirsch, and Kelley [1997]). 

In contrast, the relatively safer real estate 1–4 

family loans make up a smaller share of assets for 

young banks than for established banks. 

As table 3 also shows, the comparison between 

young and established banks holds for rate of 

growth and reliance on noncore funds. Young 

banks grow more rapidly than established banks: a 

typical young bank grows at the rate of 22.32 percent annually—roughly four times the median 

growth rate of established banks. And to fuel 

such rapid growth, young banks rely more heavily 

on noncore funds, which are expensive sources of 

funds and the first to be demanded in times of 

Table 3 

Comparison of Median Ratios between Young 

and Established Institutions 

(as of December 31, 2004) 

Variablea Young Established 

C&I 11.85***b 6.59 

RE Agricultural 0.00*** 0.14 

RE C&D 8.58*** 3.93 

RE Multifamily 1.04*** 0.75 

RE Nonfarm nonresidential 21.14*** 13.12 

RE 1-4 family 15.77*** 20.47 

Noncore liabilities 24.72*** 17.33 

Asset Growth 22.32*** 4.90 

Equity Growth -3.50*** 0.68 

No. of observations 905 2002 

a Loan ratios are expressed as a percentage of assets. The growth measures are 

one-year change (in percent) in assets and equity. 

b Based on Kendall’s rank correlation test. 

*** Indicates statistical significance at the 1 percent level. 

stress. Noncore liabilities make up 24.72 percent 

of total assets for a typical young institution, compared with 17.33 percent for established banks. 

In sum, the statistics presented in table 3 suggest 

that the poor REST ratings of new banks are likely to be attributable to higher concentrations in 

construction, C&I, and nonresidential real estate 

loans; to rapid growth; and to heavy reliance on 

noncore funds. 

2005, VOLUME 17, NO. 2 8 FDIC BANKING REVIEW 
 

Recently Chartered Banks’ Vulnerability to Real Estate Crisis 

Possible Explanations for Young Institutions’ 

More Risky Lending 

How does one explain young institutions’ heavier 

engagement in riskier real estate lending activities? One might attribute it to the geographic 

location of these institutions. Young banks tend 

to start up in areas of rapid economic and population growth (Moore and Skelton [1998]) and 

therefore young banks may simply be meeting the 

local market’s growing demand for real estate 

loans. Alternatively, perhaps young banks simply 

engage in more aggressive risk management. 

To evaluate these two possible explanations, we 

first determined whether young banks in fact are 

concentrated in rapidly growing states; we then 

compared the average REST rating of each state 

with the percentage of new banks in the state. 

On the one hand, if states with large percentages 

of new banks have high average REST ratings, 

that finding will support the first explanation. 

For if the geographic location of young institutions is important in explaining the institutions’ 

poor REST ratings, other established institutions 

in the same states will also have poor ratings, and 

the REST rating of a typical bank in these states 

will be high. On the other hand, if states with 

large percentages of new banks do not show high 

average REST ratings, the second explanation— 

more aggressive risk management—is the more 

likely. For if young institutions’ poor REST ratings are unrelated to their geographic locations, 

typical banks in the same states will not necessarily have a poor REST rating. And if aggressive 

risk management is the answer, what factors 

might explain it? 

Geographic Location 

Table 4 reports, by state, the number of young 

institutions, the total number of institutions, the 

ratio of young institutions to total institutions, 

and the median REST rating for the state, based 

on December 2004 data. In the aggregate, young 

banks make up 13.3 percent (1,197 out of 8,975) 

of all banks. But rather than being evenly distributed, young banks are concentrated in a few 

Table 4 

Median REST Ratings by State 

(as of December 31, 2004) 

Young All Young/All 

State (Number) (Number) (Percent) 

Med. REST 

Rating (All) 

AZ 32 50 64.00 

NV 21 38 55.26 

UT 31 67 46.27 

FL 121 298 40.60 

OR 15 40 37.50 

NC 38 110 34.55 

DC 2 6 33.33 

ID 6 18 33.33 

RI 5 15 33.33 

DE 11 35 31.43 

CA 93 302 30.79 

GA 100 351 28.49 

NJ 40 141 28.37 

WA 28 99 28.28 

VA 38 140 27.14 

SC 23 97 23.71 

TN 46 212 21.70 

CT 12 58 20.69 

MI 33 174 18.97 

NM 11 58 18.97 

CO 27 177 15.25 

KY 32 238 13.45 

NY 26 203 12.81 

MS 13 102 12.75 

MD 14 116 12.07 

PA 31 266 11.65 

AL 19 164 11.59 

WV 8 74 10.81 

LA 15 168 8.93 

MO 33 375 8.80 

IN 17 198 8.59 

TX 58 689 8.42 

MN 40 482 8.30 

AR 13 168 7.74 

IL 58 756 7.67 

IA 30 416 7.21 

OH 21 296 7.09 

WY 3 44 6.82 

WI 20 309 6.47 

MT 5 80 6.25 

KS 16 372 4.30 

ND 4 104 3.85 

OK 10 274 3.65 

NH 1 30 3.33 

NE 7 265 2.64 

ME 1 39 2.56 

SD 2 93 2.15 

MA 3 200 1.50 

AK 0 7 0.00 

HI 0 8 0.00 

VT 0 19 0.00 

4.98 

4.88 

4.43 

4.25 

4.49 

4.50 

2.50 

4.41 

2.65 

3.71 

4.51 

4.36 

2.91 

4.58 

3.79 

3.80 

3.75 

2.90 

3.53 

3.24 

3.78 

2.64 

2.62 

2.88 

3.42 

2.40 

2.91 

2.38 

2.85 

2.71 

2.65 

2.64 

2.58 

2.97 

2.44 

2.12 

2.51 

2.72 

3.10 

2.83 

2.15 

1.96 

2.39 

2.71 

1.99 

3.10 

2.12 

2.85 

4.25 

3.44 

2.54 

FDIC BANKING REVIEW 9 2005, VOLUME 17, NO. 2 
Recently Chartered Banks’ Vulnerability to Real Estate Crisis 

states. For instance, in Nevada and Arizona 

young banks make up more than 50 percent of all 

banks, but Alaska, Hawaii, and Vermont have no 

young banks. 

Table 4 also shows that states with large percentages of young banks tend to have poor median 

REST ratings. Arizona, where young banks constitute 64 percent of all banks, has the worst 

median REST rating—4.98. Seven of the ten 

states with the largest percentages of young banks 

have ratings worse than 4. 

A formal statistical test—again, Kendall’s rank 

correlation—confirms the positive correlation 

noted above between the ratio of new to all banks 

in a state and the median REST rating for the 

state. There is strong evidence that states with 

larger percentages of young banks tend to have 

worse median REST ratings. The rank correlation between these two variables is 0.47 and is 

highly significant. 

This result is consistent with the first explanation 

for young banks’ relatively heavier engagement in 

real estate lending—that the geographic location 

of these banks is an important contributor to 

their poor REST ratings. As earlier studies have 

showed, young banks are concentrated in urban 

and rapidly growing markets (Moore and Skelton 

[1998], DeYoung [2000]), and it is plausible that 

in such markets there are growing amounts of 

deposits and increasing demands for loans, including commercial and real estate loans. By supplying the loan demands of the local market, both 

young and established banks lend more heavily to 

the real estate sector. Consequently, banks in 

rapidly growing states have poor REST ratings. 

Risk Management: Young Banks vs. 

Established Banks 

Although geographic location—a heavy concentration in rapidly growing markets—can be considered an explanation for young banks’ poor 

REST ratings, it may not necessarily offer a full 

explanation. To explore whether young and 

established institutions engage in similar lending 

activities in high-growth states, we compared the 

loan portfolio composition of young banks in 

three high-growth states with that of established 

banks in the same states. As noted above, young 

banks are predominantly small and urban, so the 

established institutions with which we compared 

them are small and located in metropolitan statistical areas. 

Three states with relatively large percentages of 

young banks are Florida, Georgia, and New Jersey. 

In Florida, the percentage is 40.6; in Georgia, 

28.5; and in New Jersey, 28.4. Moreover, in these 

states the number of institutions, too, is relatively 

large, so statistical tests can be performed. Florida 

and Georgia have median REST ratings worse 

than 4, but a typical bank in New Jersey has a 

REST rating of 2.9. 

To test whether, in these three states, young 

banks’ loan ratios are ranked worse than the 

ratios of established banks, we used Kendall’s rank 

correlation statistic. (Rank correlation is estimated for each bank’s loan ratio and a dummy variable, valued 1 if a young bank and 0 if an 

established bank.) The results of the rank correlation test are reported in table 5. 

In our three states, young banks generally use 

riskier lending strategies. They tend to devote 

greater shares of their assets to loans, and they 

concentrate in riskier loans, such as C&I and 

construction loans. Moreover, they grow more 

rapidly than established banks. 

In New Jersey, young banks had a statistically significantly higher concentration of riskier loans 

(C&I loans, C&D loans, and nonresidential real 

estate loans). And asset- and loan-growth rates 

were significantly higher for young banks. In 

contrast, young banks had lower concentrations 

of safer loans (for example, loans to municipalities 

and 1-4 family real estate loans), which help 

shield banks from downturns (Collier, Forbush, 

and Nuxoll [2003]). 

2005, VOLUME 17, NO. 2 10 FDIC BANKING REVIEW 
 

Recently Chartered Banks’ Vulnerability to Real Estate Crisis 

Table 5 

Comparison of Median Ratios between Young and Established Institutions 

(December 2004) 

Florida Georgia New Jersey 

Loan Typea Young Established Young Established Young Established 

Agriculture 0.00 0.00 0.00 0.00 0.00 0.00 

C&I 9.66 7.37 10.86*** 7.19 8.77*** 1.05 

Other Consumer 1.39 1.48 2.16** 3.41 0.39 0.47 

Credit Card 0.00 0.00 0.00 0.00 0.00 0.00 

Depository 0.00**b 0.00 0.00 0.00 0.00 0.00 

Municipality 0.00** 0.00 0.00* 0.00 0.00* 0.00 

Agriculture–Real Estate 0.00 0.00 0.02 0.22 0.00 0.00 

Construction 10.43* 6.46 20.97 17.31 5.18*** 0.77 

Multifamily 1.42 1.53 0.41* 0.35 1.23** 0.58 

Non-residential Real Estate 24.11 24.35 22.97 19.28 25.70*** 8.19 

1–4 Family 15.32 14.02 13.08 15.58 15.99*** 37.50 

Leases 0.00 0.00 0.00 0.00 0.00 0.00 

Assets ($000s) 143,405 175,778 141,793 128,030 132,710 182,949 

Asset Growth 56.77*** 23.25 46.01*** 15.24 45.65*** 12.31 

Loans to assets 75.68 73.10 79.11** 73.45 68.03*** 56.51 

Noncore Funds 22.41** 18.86 26.90*** 21.00 16.71 17.00 

REST Score 4.76*** 3.95 5.00** 4.98 3.95*** 1.92 

No. of Observations 90 79 67 40 34 35 a Loan and liability ratios are expressed as a percentage of assets. The asset growth is one-year change (in percent) in assets. 

b Based on Kendall’s rank correlation test. 

*** Indicates statistical significance at the 1 percent level. 

** Indicates statistical significance at the 5 percent level. 

* Indicates statistical significance at the 10 percent level. 

In Florida the picture was similar. Young banks 

had a greater percentage of their assets in a riskier 

loan type (C&D loans). They grew more rapidly 

(higher asset growth) and relied more on noncore 

liabilities. And they had fewer loans to depository institutions and municipalities. 

In Georgia, young banks concentrated more heavily than established banks in C&I and multi-family loans and grew more rapidly, but their ratio of 

construction loans did not differ significantly 

from the ratio for established banks. Nevertheless, young banks in Georgia had a higher percentage of assets devoted to construction loans 

than did the young banks of New Jersey and 

Florida. In Georgia young banks devoted more 

than 20 percent of their assets to construction 

loans, whereas the comparable percentages in 

Florida and New Jersey were 10.43 percent and 

5.18 percent, respectively. 

Explanations for Aggressive Risk 

Management 

These findings suggest that geographic location 

alone does not fully explain young banks’ concentration in riskier loans and greater vulnerability to 

real estate crises. Even within rapidly growing 

states, young banks pursue more aggressive lending strategies than established banks. We now 

explore other factors that may explain young 

banks’ pursuit of riskier activities. 

One such factor may be young banks’ desire for 

rapid growth. Arshadi and Lawrence observe that 

growth in the first few years is vitally important 

for new banks’ survival and sound performance 

(Arshadi and Lawrence [1987]). With low business volume, new banks are likely to spend proportionately more on salaries and overhead 

expenses,7 and to become profitable, they need to 

7 For instance, Brislin and Santomero (1991) note that overhead expenses 

account for 92 percent of total expenses in the first quarter of operation at a 

typical de novo bank in the third Federal Reserve district (Pennsylvania, New 

Jersey, and Delaware). 

FDIC BANKING REVIEW 11 2005, VOLUME 17, NO. 2 
Recently Chartered Banks’ Vulnerability to Real Estate Crisis 

grow and use their facilities and staff more efficiently. This need may drive young banks to 

grow rapidly using noncore liabilities and relaxed 

underwriting standards. 

Another reason that young banks may be attracted to the riskier assets is that these assets tend to 

generate immediate income. For instance, commercial real estate loans have large up-front fees. 

A third possible reason is that specialized business 

strategies require expertise in fewer areas and may 

help young institutions find their market niche 

(Brislin and Santomero [1991]). 

Fourth, young banks’ concentration in risky activities may result from the growth constraints they 

encounter. Unlike their established counterparts, 

young banks lack established customer relationships and market recognition. As a result, their 

growth is constrained by limitations on deposits 

and on good investment opportunities. Young 

banks may be left to lend to the pool of borrowers 

with poor credit and to finance highly risky ventures. Economists refer to this phenomenon as 

adverse selection. 

Whatever the rationale for the aggressive lending 

strategies undertaken by young banks, they are 

particularly vulnerable to downturns in the real 

estate market, as the experience of the new Texas 

banks in the 1980s demonstrates.8 New Texas 

banks in the early 1980s were heavily concentrated in growing markets; according to Gunther, 

new banks made up 54 percent of the banks in 

the five largest and most rapidly growing markets 

in Texas (Austin, Dallas, Fort Worth–Arlington, 

Houston, and San Antonio). Gunther’s analysis 

suggests that new banks pursued riskier strategies, 

such as concentrating on riskier loans and relying 

more heavily on wholesale funds. 

After oil prices plummeted in 1986, Texas entered 

a recession and experienced a real estate crisis. 

Although many banks suffered, it was evident 

that the recession had an especially great effect 

on de novo banks. In the subsequent four years 

39 percent of de novo banks failed, but only 21 

percent of established banks. Finding that new 

banks with capital levels similar to the levels of 

established banks and risk did not fail at significantly higher rates than mature banks, Gunther 

concludes that new banks’ relatively higher risk 

postures led to the high incidence of failure. 

The experience of the new Texas banks offers a 

scenario of what could happen to the current vintage of young banks if the markets now experiencing rapid growth—and where there are many 

young banks—were to experience busts. Young 

banks in these states would be likely to experience greater failures and losses. Of course, one 

must be cautious when extrapolating from a banking experience in the 1980s to a banking experience today, for even if economic conditions were 

to become comparable to those in the 1980s, the 

regulatory environment, as noted above, differs 

greatly from what it was in the 1980s. 

Summary and Conclusion 

It is well known that new banks are financially 

fragile and more susceptible to failure than established banks. What is less well known is that new 

banks have a substantial exposure to the real 

estate market. The extent of this exposure is 

reflected in the poor REST ratings of new banks. 

For example, in December 2004 the median 

REST rating of young banks was 4.54, whereas 

the median for established banks was 3.03. This 

difference is statistically significant. 

Part of the explanation for young banks’ vulnerability to a real estate crisis is geographic location. 

Young banks tend to locate in rapidly growing 

markets, where economic activity is greater and 

the demand for riskier real estate loans (such as 

C&D loans and C&I loans) is also greater. 

But if geographic location fully explained young 

banks’ vulnerability to a real estate crisis, the 

established banks in the same market would use 

strategies roughly similar to those used by the 

8 Gunther (1990) tracks the failure rates during the period 1986 to 1989 of 

banks that had been established between 1980 and 1985. Accordingly, new 

banks in his study were ten years old and younger. 

2005, VOLUME 17, NO. 2 12 FDIC BANKING REVIEW 
 

Recently Chartered Banks’ Vulnerability to Real Estate Crisis 

young banks. Our research shows that they do 

not. A closer examination of young banks in 

three rapidly growing states—Florida, Georgia, 

and New Jersey—suggests that the young banks in 

those states use riskier lending strategies than 

their established counterparts. 

The disproportionate use by young banks of the 

risky strategies may have a number of explanations. Young banks may undertake aggressive 

business strategies in order to grow rapidly, bolster 

low earnings, and become profitable. More 

importantly, their heavy concentration in risky 

loans may reflect the severe problem of adverse 

selection that they encounter: lacking a wellestablished customer base, new banks may find 

that a disproportionately large share of the loan 

applications they receive are from borrowers with 

risky ventures who have been turned down by 

other banks. In other words, the financial vulnerabilities of young banks may in fact be augmented 

by these institutions’ asset composition. 

Past experiences hint at the extent to which 

adverse episodes in the real estate market could 

affect these fledgling institutions. Thus, regulators are further motivated to closely monitor not 

only the banks’ performance but also their risk 

management. 

FDIC BANKING REVIEW 13 2005, VOLUME 17, NO. 2 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recently Chartered Banks’ Vulnerability to Real Estate Crisis 

REFERENCES 

Arshadi, Nasser, and Edward C. Lawrence. 1987. An Empirical Investigation of New Bank 

Performance. Journal of Banking and Finance 11, no. 1:33–48. 

Berger, Allen, Seth D. Bonime, Lawrence G. Goldberg, and Lawrence J. White. The 

Dynamics of Market Entry: The Effects of Mergers and Acquisitions on Entry in the 

Banking Industry. Journal of Business (forthcoming). 

Brislin, Patricia, and Anthony M. Santomero. 1991. De Novo Banking in the Third 

District. Federal Reserve Bank of Philadelphia Business Review (January/February): 

3–10. 

Collier, Charles, Sean Forbush, and Daniel Nuxoll. 2003. Evaluating the Vulnerability of 

Banks and Thrifts to a Real Estate Crises. FDIC Banking Review 15, no. 4:19–36. 

Critchfield, Tim, Tyler Davis, Lee Davison, Heather Gratton, George Hanc, and Katherine 

Samolyk. 2004. Community Banks: Their Recent Past, Current Performance, and 

Future Prospects. FDIC Banking Review 16, no. 3:1–56. 

DeYoung, Robert. 1999. Birth, Growth, and Life or Death of Newly Chartered Banks. 

Federal Reserve Bank of Chicago Economic Perspectives 23, no. 3:18–35. 

———. 2000. For How Long Are Newly Chartered Banks Financially Fragile? FRB 

Chicago Working Paper 2000-09. Federal Reserve Bank of Chicago. 

———. 2003. De Novo Bank Exit. Journal of Money, Credit, and Banking 35, no. 5:711–28. 

DeYoung, Robert, Lawrence G. Goldberg, and Lawrence J. White. 1999. Youth, 

Adolescence, and Maturity of Banks: Credit Availability to Small Business in an Era 

of Banking Consolidation. Journal of Banking and Finance 23, no. 2–4:463–92. 

DeYoung, Robert, and Iftekhar Hasan. 1998. The Performance of De Novo Commercial 

Banks: A Profit Efficiency Approach. Journal of Banking and Finance 22, no. 

5:565–87. 

Dunham, Constance R. 1989. New Banks in New England. New England Economic Review, 

30–41. 

Federal Deposit Insurance Corporation (FDIC). 1997. History of the Eighties—Lessons for the 

Future. Vol. 1. FDIC. 

Gunther, Jeffery W. 1990. Financial Strategies and Performance of Newly Established Texas 

Banks. Federal Reserve Bank of Dallas Financial Industry Studies (December): 9–14. 

Hunter, William C., and Aruna Srinivasan. 1990. Determinants of De Novo Bank 

Performance. Federal Reserve Bank of Atlanta Economic Review 75, no. 2:14–25. 

Hunter, William C., James A. Verbrugge, and David A. Whidbee. 1996. Risk Taking and 

Failure in De Novo Savings and Loans in the 1980s. Journal of Financial Services 

Research, 10:235–71. 

Keeton, William, Jim Harvey, and Paul Willis. 2003. The Role of Community Banks in the 

U.S. Economy. Federal Reserve Bank of Kansas City Economic Review 88, no. 

2:15–43. 

2005, VOLUME 17, NO. 2 14 FDIC BANKING REVIEW 
 

 

 

 

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McDill, Kathleen. 2004. Resolution Costs and the Business Cycle. Working Paper 2004­

01. FDIC. 

Moore, Robert R., and Edward C. Skelton. 1998. New Banks: Why Enter When Others 

Exit? Federal Reserve Bank of Dallas Financial Industry Issues (Q1), 1-7. 

Nuxoll, Daniel A., John O’Keefe, and Katherine Samolyk. 2003. Do Local Economic Data 

Improve Off-Site Bank-Monitoring Models? FDIC Banking Review 15, no. 2:39–53. 

Seelig, Stephen, and Timothy Critchfield. 2003. Merger Activity as a Determinant of De 

Novo Entry into Urban Banking Markets. Working Paper 2003-01. FDIC. 

FDIC BANKING REVIEW 15 2005, VOLUME 17, NO. 2 
Politics and Policy: The Creation of the 

Resolution Trust Corporation 

by Lee Davison* 

As the U.S. government sought solutions to the 

S&L crisis in 1989 and set about revamping the 

thrift industry’s activities, regulation, and supervision and restoring the industry’s insurance fund, it 

faced a multitude of challenges. One of the most 

significant was to create a mechanism that would 

resolve all then-insolvent thrifts as well as the 

large number of thrifts expected to become insolvent in the near future. The mechanism not only 

had to be created but it also (optimally) had to be 

able to accomplish its mission—closing, selling, or 

merging institutions and disposing of vast amounts 

of assets—as quickly as possible. Furthermore, it 

had to do so in a way that would minimize taxpayer costs and avoid serious dislocation in markets. 

Quite obviously some of these goals were at crosspurposes. One circumstance that aided policymakers was the existence of the Federal Deposit 

Insurance Corporation (FDIC)—that agency could 

provide expertise, an initial set of policies, and so 

allow for a relatively swift start to the task. Even 

with this advantage, the task of creating the necessary mechanism was not going to be easy. 

Given the extensive use of tax dollars that would 

be required, inevitably the mechanism would be a 

governmental entity. But because of recent history, the creation of such an entity was fraught with 

problems. In 1988 the handling of troubled and 

failed thrifts by the Federal Home Loan Bank 

Board (FHLBB) had been roundly criticized; and 

the record of the Federal Asset Disposition Association (FADA), which the FHLBB had created in 

1985, also failed to inspire confidence. (Both the 

1988 deals and the FADA’s record are described in 

the appendix.) Awareness of these past failures— 

whether real or perceived—helped shape the policy decisions relevant to the creation of the 

Resolution Trust Corporation (RTC) and where 

governmental responsibility for the its work would 

lie. 

President George H.W. Bush announced his plan 

for what would become the Financial Institutions 

Reform, Recovery, and Enforcement Act 

(FIRREA) on February 9, 1989. This bill promised to become the most significant legislation 

affecting depository institutions in a decade and 

the most important legislation affecting the S&L 

industry since the Great Depression. The adminis­

* The author is a historian in the FDIC’s Division of Insurance and Research. 

The author would like to thank Matthew Green and Peggy Kuhn for their very 

thorough reviews of an earlier draft of this article, and would also like to 

thank David Cooke, Jack Reidhill and Lynn Shibut for their helpful readings of 

the present version. 

FDIC BANKING REVIEW 17 2005, VOLUME 17, NO. 2 
 

Politics and Policy: The Creation of the Resolution Trust Corporation 

tration began with the ambitious objective of 

achieving passage of the legislation within 45 days, 

and at least initially, Congress was receptive to the 

idea of a speedy process. Rep. Frank Annunzio 

told the president that normally such a “timetable 

to rewrite major portions of the financial laws of 

our country would not be adequate, but these are 

unusual times, and swift action must be taken.”1 

The breadth of the legislation and the variety of 

interested parties, however, combined to make this 

timetable unworkable, and FIRREA was not signed 

into law until August 9, six months after the president’s plan was announced. 

FIRREA abolished the Federal Savings and Loan 

Insurance Corporation (FSLIC), the insurance arm 

of the FHLBB, and created the Savings Association Insurance Fund (SAIF), a new deposit insurance system for thrifts to be administered by the 

FDIC. FIRREA also dismantled the FHLBB and, 

in its stead, created the Office of Thrift Supervision (OTS), an agency within the Treasury 

Department, both to charter federal thrifts and to 

serve as the primary federal regulator of all thrifts. 

The law laid down much stricter minimum capital 

and accounting requirements for thrifts (including 

phasing out the inclusion of supervisory goodwill 

by January 1995),2 tightened the “qualified-thriftlender” test, and altered the rules on thrift acquisitions by bank holding companies. The law gave 

financial institution regulators significant new 

enforcement powers, made substantial changes to 

existing FDIC authorities and granted new powers 

to the FDIC, and reformed the Federal Home Loan 

Bank System. Finally, FIRREA also created the 

RTC—a government agency charged with tasks 

never before undertaken in the history of the 

United States.3 

As enacted, FIRREA made the RTC a limited-life 

(for five years) entity that would manage and 

resolve all formerly FSLIC-insured institutions 

placed under conservatorship or receivership from 

January 1, 1989, through August 9, 1992.4 As of 

the date of enactment, the RTC was to succeed 

the FSLIC in its role as conservator or receiver of 

any institution. General oversight of the RTC was 

vested in an Oversight Board, which was to direct 

the RTC’s overall policy, but operational control 

would rest with the RTC itself. The Board of 

Directors of the FDIC was to serve as the RTC’s 

Board of Directors (and FIRREA expanded the 

FDIC’s Board from three to five members, adding 

the head of the OTS and a member to be nominated by the president); and the FDIC would be 

the RTC’s “exclusive manager.” The RTC was to 

have no employees of its own but was to use the 

employees of other federal departments or agencies, most notably the FDIC. In addition, the 

RTC was to manage and dissolve the FADA within 180 days and was to review the transactions 

made by the FSLIC during 1988 to determine if 

cost savings could be found. The law also dealt 

with issues such as contracting, audits and reporting, asset disposition, and the mechanism for funding the RTC. 

The RTC created by FIRREA’s enactment was recognizably the product of the administration’s 

approach, but the new agency also reflected 

changes made during the legislative process. The 

RTC emerged both more defined by statutory 

requirements and more accountable to the public, 

but also more cumbersome by virtue of an 

intragovernmental battle for authority and the 

potentially contradictory goals that Congress grafted onto the structure. All the changes would sig1 Annunzio was the chairman of the House Subcommittee on Financial 

Institutions Supervision, Regulation and Insurance. George Bush Presidential 

Library (GBPL) FI002/14513: Annunzio to Bush (March 6, 1989). 

2 Earlier in the 1980s, faced with growing numbers of insolvent thrifts but 

without any means of paying for their closure, the government encouraged 

mergers as a way to deal with this intractable problem. To make such 

transactions viable for acquiring institutions, the government allowed the 

acquirers (for the purposes of meeting capital requirements) to offset the 

liabilities they were assuming with a counterbalancing paper asset called 

supervisory goodwill. Acquirers were allowed as much as 40 years to write 

off supervisory goodwill. In addition, other variances from generally accepted 

accounting principles (GAAP) were allowed for all thrifts. FIRREA’s provision 

therefore had serious negative implications for many acquirers’ net worth, 

even their solvency, and led to litigation that eventually reached the Supreme 

Court; in 1996 the Court ruled (in United States v. Winstar) that the 

government had had no right to repudiate accounting variances that had been 

included in resolution contracts. As a result of this decision, a number of 

institutions successfully sued the government for damages. 

3 This brief summary of FIRREA is by no means exhaustive. For a detailed 

examination of the elements of the statute, see Bloch and Williams (1989). 

4 Despite the statute’s date of January 1, 1989, the FSLIC did resolve a small 

number of small institutions early in 1989. These S&Ls therefore “belonged” 

to the FSLIC Resolution Fund, and so did not pass to the RTC. Starting in 

February 1989, the FDIC took responsibility for S&L conservatorships that 

would have been run by the FSLIC—these institutions did pass to the RTC. 

2005, VOLUME 17, NO. 2 18 FDIC BANKING REVIEW 
Politics and Policy: The Creation of the Resolution Trust Corporation 

nificantly affect the way in which the RTC would 

carry out its work. 

The next section presents an overview of the 

administration’s initial plan and the changes it 

underwent. The process by which those changes 

were achieved is spelled out in detail in subsequent 

sections. The appendix briefly recapitulates the 

history of the FADA and the 1988 FSLIC deals 

and the ways in which FIRREA proposed to dispose of both of them. 

Overview: The Initial Plan and the Ways It 

Changed 

The creation of the RTC was affected by the magnitude of the changes contemplated in the bill the 

administration sent to Congress, the need for the 

bill’s speedy enactment,5 and the lack of detail in 

the administration’s initial pronouncements on the 

RTC. Because 1) the bill embraced the wholesale 

modification not only of thrift regulatory structure 

but also of many aspects of thrift regulation and 2) 

speed was critical, the RTC was considerably less 

visible than it might have been. And the lack of 

detail (among other causes) meant that despite the 

interest and involvement of people both inside and 

outside the government, many aspects of the 

RTC’s structure remained undecided until very late 

in the legislative process, while other aspects were 

left entirely (not always unintentionally) unaddressed. 

Although the RTC was at the heart of the administration’s plan for restoring the thrift industry,6 as 

first announced the plan did not spell out the 

RTC’s structure and operating procedures. Rather, 

it provided only a few basics. It simply established 

the RTC (which was not to be deemed an agency 

of the U.S. government) for a limited life of five 

years to manage and resolve all FSLIC-insured 

institutions placed either in receivership or conservatorship for the three years following enactment. 

It would also take over from the FSLIC as conservator or receiver for institutions where the FHLBB 

had appointed a conservator or receiver after January 1, 1989. In addition, the RTC was to manage 

the assets of the FADA and wind that organization 

down within 180 days. The real work of resolution 

and asset disposition would be contracted out, 

much of it through a management contract to the 

FDIC, which was considered the most experienced 

agency available to perform such tasks. To carry 

out its mission, the RTC was to receive powers 

identical to those of the FDIC—basic corporate 

powers—as well as several special powers. Included among the latter would be the power to enter 

into contracts with the FDIC or other entities, so 

long as the FDIC would be the RTC’s “primary 

manager” and that all contracts other than those 

with the FDIC be subject to competitive bid. The 

RTC also would be given the power to set credit 

standards for institutions for which it was responsible, to require mergers or acquisitions, to organize 

federal mutual savings associations, and to review 

the 1988 FSLIC cases. Institutions managed by 

the RTC were to be restricted in certain ways—for 

example, with respect to asset growth, lending, use 

of brokered deposits, and interest rates. As for 

funding, the RTC would be given the power to 

issue capital certificates to the funding mechanism 

espoused by the administration (the Resolution 

Funding Corporation) and would be permitted to 

borrow $5 billion from the Treasury.7 The RTC 

would be overseen by an Oversight Board, which 

would serve as the RTC’s Board of Directors and 

would consist of the Treasury Secretary, the Chairman of the Board of Governors of the Federal 

Reserve System, and the Attorney General. The 

Oversight Board would appoint a CEO to head the 

new agency. 

With respect to size, the administration initially 

conceived of the RTC as a relatively small entity. 

Although a Republican administration was forced 

to swallow the bitter pill of paying for a good part 

of the rescue with taxpayer dollars, it disdained to 

5 Senate Committee on Banking, Housing, and Urban Affairs (1989b), 29. 

“The emergency nature of this legislation requires that Congress give the 

Executive Branch latitude to fashion a system in which the Administration has 

confidence. If time had permitted, however, the Committee would have 

expanded its hearings to include discussion of alternative means to 

accomplish the Administration’s goals.” 

6 See the testimony by Treasury Secretary Nicholas Brady before the Senate 

(U.S. Senate Committee on Banking, Housing, and Urban Affairs [1989a], 23). 

7 U.S. Senate (1989a), §501. 

FDIC BANKING REVIEW 19 2005, VOLUME 17, NO. 2 
Politics and Policy: The Creation of the Resolution Trust Corporation 

establish a large new federal bureaucracy.8 Certainly few in Congress or in the country at large 

would have applauded the establishment of such a 

bureaucracy, and if President Bush was going to 

persuade Republicans to support the plan, creating 

a large new agency would best be avoided. Treasury Secretary Nicholas Brady stated that the RTC 

was not envisioned as having a “large staff component.” Robert Glauber amplified on this vision 

during his confirmation hearings for the position of 

Undersecretary of Treasury for Finance in May, 

when he stated that the administration intended 

the RTC to be an “administrator of contracts” and 

that it was to be “a lean organization . . . that does 

not exceed 100 employees.”9 

In retrospect, the part of the administration’s plan 

that called for the RTC to be a small organization 

was wholly unrealistic. Even if the RTC had been 

solely a contract administrator, the sheer volume of 

business in managing and disposing of assets would 

clearly have required many more people for adequate oversight. As it turned out, however, before 

FIRREA was passed the administration substantially altered its somewhat abstract notion of RTC 

management and structure. 

Other aspects of the administration’s original plan 

for the RTC’s structure and function also underwent change, largely as a result of a debate that 

was mostly carried on within the government— 

unsurprisingly, given that the establishment of the 

RTC involved allocating and reallocating governmental responsibilities.10 Varying opinions from 

the administration, the FDIC, and Congress set 

the parameters of discussion. This fundamental 

dynamic did not prevent specific interest groups 

outside the government from playing a role in the 

RTC’s creation, nor did it mean that the RTC 

occasioned little comment. Two interest groups 

that sought to influence the shape of the RTC 

should be mentioned specifically. One was the real 

estate industry, which was concerned both with 

the effects of RTC operations on local real estate 

markets and with the role of private contractors in 

the management and disposition of assets. The 

second group consisted of affordable-housing advocates—groups pressing for an increased availability 

of affordable housing for lower-income families. 

As for other interest groups, congressional perspectives inherently brought the viewpoints of various 

constituencies to the legislative process. This relationship was reflected especially in the opinions of 

legislators from areas such as the Southwest, where 

the S&L crisis and its attendant problems were 

particularly severe. 

One group that played little or no role in the 

establishment of the RTC was the thrift industry 

itself. Insolvent thrifts, the group with which the 

RTC was to deal, could exert little influence on 

Capitol Hill. And as FIRREA progressed through 

Congress, it became clear that even on behalf of 

the industry’s surviving members, the once-powerful thrift industry lobby held much less sway with 

legislators than it had during the previous decade. 

The U.S. League of Savings Institutions, the 

industry’s trade group, had had tremendous influence in both Congress and with the FHLBB, and 

its agenda had shaped thrift deregulation in the 

early 1980s. The League successfully fought the 

Reagan administration in the mid-1980s as it 

sought ways to recapitalize the FSLIC, not only 

because such plans meant that the government 

would be able to close insolvent S&Ls (which, of 

course, made up a large and growing part of the 

League’s membership), but also because they normally involved some types of industry contributions. When recapitalization was finally enacted 

in the 1987 Competitive Equality Banking Act, 

the League still managed to decrease the amount 

from $15 billion to $10.8 billion. Just two years 

later, however, the industry’s power had waned and 

what little influence it had left was focused on 

areas far more important to the industry in the 

long run than was the RTC—areas such as 

8 Secretary Brady did admit that the FDIC would probably have to increase its 

staff resources to manage the liquidation of RTC assets. He was uncertain 

just how many new staff members would be required but thought that added 

efficiencies would allow the increase to be rapidly scaled back (Senate 

Committee on Banking, Housing, and Urban Affairs [1989a], 619). 

9 House Committee on Banking, Finance and Urban Affairs (1989a), 23. See 

also U.S. Congress (1989) (April 17), S3995; Senate Committee on Finance 

(1989), 7–49. 

10 Of course, many parties outside government were very interested in the 

nascent RTC, particularly in the profits that could flow from being involved in 

the RTC’s work or from astutely adapting to its policies. 

2005, VOLUME 17, NO. 2 20 FDIC BANKING REVIEW 
Politics and Policy: The Creation of the Resolution Trust Corporation 

FIRREA’s new regulatory regime and capital 

requirements. Certainly the industry was extremely interested in the amount of money it would be 

required to contribute to the RTC’s funding, but 

here again, it had little effective voice in trying to 

increase taxpayer contributions while decreasing 

its own.11 Although the thrift lobby did not completely ignore the RTC, apart from its role in funding the new entity, the industry paid comparatively 

little attention until the legislative process was 

well along. 

Input from the FDIC 

As noted above, the management structure initially envisaged by the administration was that a very 

small entity would be directed by a small group of 

senior officials and would contract its activities out 

primarily to the one existing government agency 

with experience in this area—the FDIC—but also 

to private sector firms. Some aspects of this initial 

plan were undoubtedly unworkable, but in any 

case the FDIC’s leadership was unhappy with the 

agency’s place in the division of responsibility and 

sought a more active role. Accordingly, a compromise was reached: the FDIC would become the 

RTC’s exclusive manager, but an administrationcontrolled Oversight Board would determine overall strategy. Congress tinkered around the edges of 

this accommodation between the FDIC and Treasury but, because time was short, left it essentially 

intact. The compromise meant that the RTC’s 

management structure would be unique—and 

complicated. 

Pressure from Congress 

In other areas, it was Congress that made significant changes and additions to the administration’s 

plan—without much resistance from the administration. For one thing, the creation of a new government agency was guaranteed to provoke 

disagreement. For another, since the RTC was certain to spend vast amounts of taxpayer money and 

would control and dispose of a truly immense 

quantity of assets with the potential to affect markets across the nation, the administration’s initial 

undefined outline for the RTC was not likely to 

remain unaltered. 

Congress viewed the administration’s plan as 

imprecise and moved to refine it. The process was, 

of course, not one-sided, and the administration 

responded with clarifications of its own (as in the 

case of the Oversight Board).12 In general, the 

administration sought to preserve what it viewed 

as necessary flexibility in the RTC’s mission and 

operations. 

Congressional critics, broadly speaking, focused 

their modifications on three areas (which were not 

necessarily mutually exclusive). First, because 

many observers both inside and outside Congress 

believed that the RTC had the potential to generate scandal and corruption on a grand scale, Congress looked to increase accountability within the 

RTC and among its ancillary functions.13 Second, 

because the experiences of both the FADA and 

the 1988 FSLIC deals were fresh in the minds of 

legislators, Congress tried to influence—in some 

respects very specifically—the way the RTC would 

do its job, something the administration tended to 

see as legislative micromanagement. Finally, Congress wanted to address public and social policy 

goals that were not necessarily immediately germane to the RTC’s task. The administration 

opposed many of the proposed changes in this 

area, believing not only that they were a distraction but also that they might impair the RTC’s 

11 The same might be said of the industry’s ability to influence the 

administration. For example, the U.S. League of Savings Institutions sought a 

personal meeting with President Bush about a week before he was to 

announce his S&L cleanup plan, but since the League had already met with 

Bush’s senior advisor on the matter (Richard Breeden), it was not granted a 

meeting with the president (GBPL FI002/003274: B. R. Beeksma and 

Frederick L. Webber to Bush [January 30, 1989], and accompanying White 

House tracking worksheet). 

12 The conference report noted that the RTC provisions in the final bill 

consisted of “the Administration’s proposal as modified by additional 

comments made by the Administration during the course of the conference” 

(U.S. House [1989c], 412). 

13 For example, see Sen. David Pryor’s statement that the RTC’s activities 

would be a “fertile breeding ground” for scandal (U.S. Congress [July 17, 

1989], S8058). Pryor introduced a separate “Ethics in Thrift Resolutions 

Act,” which he hoped would be incorporated into FIRREA (S.1329): for 

purposes of conflict-of-interest and disclosure regulations, all contractors 

would have been treated as if they were agency employees. Even after the 

conference agreement, Rep. Toby Roth stated that the RTC contained the 

“seeds of a major scandal.” (U.S. Congress [July 31, 1989], E2750). 

FDIC BANKING REVIEW 21 2005, VOLUME 17, NO. 2 
Politics and Policy: The Creation of the Resolution Trust Corporation 

ability to accomplish its mission at the lowest cost 

to the taxpayer, but it did not think any of these 

issues important enough to take a stand on, and 

virtually all of Congress’s changes in these three 

areas were enacted with relatively little apparent 

discussion. 

Such was not the case when it came to deciding 

just how to raise the money the RTC would 

receive to resolve insolvent thrifts. This question 

engendered the most partisan and prolonged 

debate associated with the RTC’s creation. The 

estimates of how much money would be needed 

ranged widely, but once the administration adopted its $50 billion estimate, most of the debate was 

driven by the politics of the budget deficit. The 

Republican administration wanted a funding structure that would put the expense “off-budget.” The 

Democrats controlled Congress, and many of them 

wanted to fund the RTC with direct borrowing 

from the Treasury (a plan that would be less costly), which would move the expense “on-budget.” 

The budget deficit, after decreasing in 1987 from 

all-time high levels in the two previous years, had 

risen substantially in 1988, and neither the administration nor Republicans in Congress were eager 

to fuel further increases in the deficit. Congressional Democrats’ arguments about the costs of the 

“off-budget” plan were accurate, but a rising deficit 

also proved too useful a political cudgel to leave 

unused. This battle had the very real potential to 

disrupt and delay FIRREA’s passage, but other than 

the (very salient) fact that the initial funding 

would quickly prove inadequate, the debate was 

mostly a political one and meant relatively little to 

the genesis of the RTC. 

Management Structure: The Oversight Board, 

the FDIC, and the RTC 

The Bush administration’s initial plan for the 

Oversight Board was clearly designed to ensure the 

administration’s control over the use of substantial 

amounts of taxpayer dollars. Because the administration would be held accountable for the RTC’s 

use of the money, this approach was understandable. The Oversight Board, to be chaired by the 

Secretary of the Treasury and also composed of the 

Chairman of the Federal Reserve Board and the 

Attorney General, was to serve as the RTC’s Board 

of Directors and was to “review and have overall 

responsibility over the work, progress, management 

and activities” of the RTC. It was also to approve 

or disapprove of any RTC action, including those 

dealing with the disposition of individual institutions.14 The need for this kind of control was at 

least partly a byproduct of the perception that the 

deals put together by the FSLIC in 1988 had committed taxpayer dollars without authorization. 

Congress essentially went along with the basic idea 

of Oversight Board control of the RTC. However, 

both the Senate and House suggested changes to 

the Board’s composition, with each house’s banking committee placing additional members on the 

Oversight Board. The Senate Banking Committee 

decided that two private sector individuals with 

experience equivalent to that of the CEO of a 

major corporation should be on the Board: many 

legislators thought that the named government 

officials would probably not have enough time to 

devote to the work of the RTC, and noted that 

these additions would add essential expertise in 

real estate and management.15 The whole Senate, 

spurred by concern about the local nature of real 

estate assets, added further private sector input by 

providing that 12 regional advisory boards be 

established.16 Treasury officials opposed the addi14 This power was reflected in early versions of the bills in both the House 

and Senate. See U.S. Senate (1989c), §501(§21A(d)), and U.S. House 

(1989a), §501 (§21A(c)(5)). 

15 Senate Committee on Banking, Housing, and Urban Affairs (1989b), 29. 

Senator Robert Kerrey later introduced an amendment that would have 

created a seven-member Oversight Board. He wanted to add four private 

sector members having experience in banking, finance, real estate, and 

business management; reduce the government members to ex officio status; 

and have one of the private sector members appointed chairman by the 

president. He also argued that the government members, having their own 

substantial responsibilities, would be unable to devote adequate time to 

overseeing the RTC. His stated goal was to insulate the RTC from both 

political and financial pressure, and he predicted that Congress would regret 

its failure to create the position of a strong appointed chairman independent 

of direct ties to any interest group. His amendment was opposed by the 

administration as forcing it to relinquish too much authority. Many other 

senators felt that other safeguards, including regional advisory boards and 

stringent ethics requirements, would address Kerrey’s concerns, and the 

amendment was defeated, 66–32. (U.S. Congress [April 17 and 18, 1989], 

S4012; S4074ff.). 

16 U.S. Congress ([April. 18, 1989], S4093). 

2005, VOLUME 17, NO. 2 22 FDIC BANKING REVIEW 
 

Politics and Policy: The Creation of the Resolution Trust Corporation 

tions to the Oversight Board, which they believed 

was properly made up only of public sector representatives. They argued that the RTC could draw 

from private sector expertise by establishing advisory groups and contracting with private sector 

firms.17 

The House Banking Committee added three members: the Secretary of Housing and Urban Development (HUD), an individual from the private 

sector, and the Chairman of the FDIC as a nonvoting member.18 Banking Committee member 

Marge Roukema argued that adding the three new 

members would mean that “all relevant parties” 

were on the Board; the inclusion of the HUD secretary was logical because the department “already 

has experience in residential property disposition.” 

In response, Assistant Treasury Secretary David 

Mullins stated that although having the FDIC on 

the Board would not necessarily create a conflict of 

interest, the administration preferred that that 

agency not be represented.19 Another administration official labeled the inclusion of the FDIC a 

grab for power by the agency.20 The emphasis on 

placing private sector experience on the Board, an 

emphasis that private real estate interests supported and lobbied for, stemmed from the notion that 

asset disposition was an activity with which government officials were unfamiliar—as had been 

attested to, many thought, by the experience of 

the FADA.21 For the most part the concern about 

asset disposition reflected fears that the new entity 

would engage in asset dumping.22 The whole 

House made other changes affecting the Oversight 

Board; perhaps most significantly, it required the 

Oversight Board to establish and oversee a minority outreach program to ensure that minority- and 

women-owned entities were included in contracts 

with the RTC.23 

The composition of the Oversight Board, however, 

was a relatively minor point of contention compared with the Board’s function. Indeed, the 

House Banking Committee’s inclusion of the FDIC 

Chairman as a nonvoting member of the Board 

foreshadowed the larger debate, which centered on 

the role of the FDIC vis-à-vis the role of the Oversight Board in the RTC. The crux of the question 

had been identified in April by the U.S. General 

Accounting Office (GAO), which expressed concern about the administration’s conception of the 

Oversight Board as “operationally involved in 

decisions about case resolution.” Comptroller 

General Charles Bowsher argued that the RTC 

should make such decisions, with the Oversight 

Board “limited to evaluating the appropriate use of 

funds, and providing a check on the process.”24 

Although the GAO report was directed to Congress, the debate occurred not in that body but 

between the administration and the FDIC. As 

noted above, the administration plan placed the 

Oversight Board in charge of every aspect of RTC 

activity—but it also named the FDIC as the RTC’s 

“primary manager.” This nomenclature was puzzling to many. If the Oversight Board was charged 

with directing the RTC, just what was the FDIC’s 

role? The Senate Banking Committee, although it 

did not change the administration’s plan, noted 

that it was “not entirely clear how the relationship 

17 GBPL OA/ID 02054: Memorandum from Gregory P. Wilson (Deputy Assistant
 

Treasury Secretary for Financial Institutions Policy) to Robert R. Glauber
 

(Undersecretary of Treasury for Finance Designate), April 20, 1989.
 

18 It was reported that L. William Seidman (Chairman of the FDIC) was
 

encouraging Congress to replace the Federal Reserve member of the Oversight
 

Board with HUD Secretary Jack Kemp (Rehm [1989a], 1). It was also
 

reported that Kemp had been “angling” to play a role in the S&L rescue
 

(National Mortgage News [1989a]). Shortly after the administration’s plan
 

was announced, Kemp stated that the S&L industry’s rescue should be
 

accompanied by a commitment to providing housing for the poor (Tolchin
 

[1989]). Since the FDIC was to serve as primary manager for the RTC but
 

the idea was that the Oversight Board might contract with other entities, the
 

House made the FDIC’s position nonvoting so as to remove possible conflicts
 

of interest.
 

19 For Roukema and Mullins, see Garsson (1989b).
 

20 FDIC spokesman Alan Whitney said the FDIC had taken the position that it
 

did not want voting membership and so was not seeking to increase its power
 

(National Mortgage News [1989b]). However, when the FDIC presented its
 

position on priority issues in FIRREA to congressional staff in late June, the
 

agency recommended that the FDIC Chairman should be a voting member of
 

the Oversight Board (Climo [June 23, 1989], 26).
 

21 See U.S. Congress (April 18, 1989), S4093.
 

22 The National Association of Realtors and the National Association of
 

Homebuilders were prominent lobbyists on behalf of the inclusion of private
 

sector members. See National Mortgage News (1989a). For the views of
 

these groups, see also Senate Committee on Banking, Housing, and Urban
 

Affairs (1989a), 469ff.
 

23 House Committee on Banking, Finance and Urban Affairs (1989c), 356. The
 

House bill was also more specific than the Senate’s about the nature of the
 

Oversight Board, declaring that it was a body corporate and enumerating its
 

powers as such.
 

24 Letter from Comptroller General Charles Bowsher to Sen. Donald Riegle,
 

April 7, 1989, printed in U.S Congress (April 19, 1989), S4274.
 

FDIC BANKING REVIEW 23 2005, VOLUME 17, NO. 2 
Politics and Policy: The Creation of the Resolution Trust Corporation 

between the RTC and its primary manager, the 

FDIC, will evolve.”25 The FDIC and its chairman 

clearly did not approve of a system in which the 

agency was asked to shoulder the burden of conducting the S&L cleanup without having any say 

in how the cleanup would be run.26 

By June, negotiations between the FDIC and Treasury were under way to clarify the operating structure of the RTC and the Oversight Board’s powers. 

The administration proposed replacing the original 

and somewhat nebulous notion of the FDIC as 

“primary manager” with a structure in which the 

FDIC would be the “exclusive manager” of the 

RTC. In other words, instead of simply being the 

RTC’s primary (but not necessarily only) contractor, the FDIC would now run the RTC, and any 

contracts with private sector firms would be 

arranged and overseen by the FDIC. However, the 

FDIC believed that the draft management agreement presented by Treasury still gave the Oversight Board powers that would allow it to have too 

great an influence on RTC operations. The FDIC 

also believed that if the agency was to serve as the 

RTC’s exclusive manager, it ought to have a seat 

on the Oversight Board. Treasury rejected this 

position and insisted that the FDIC have no presence on the Oversight Board. In this impasse, 

Treasury sought to preempt further negotiation by 

setting out the FDIC’s role legislatively—that is, 

going through Congress to settle the argument. 

The FDIC Board responded by suggesting both to 

Treasury and to Congress that the FDIC’s Board of 

Directors serve as the RTC’s Board; that any funds 

appropriated for the S&L cleanup be appropriated 

directly for the FDIC’s use; and that supervision be 

provided by the president and congressional committees rather than by the Oversight Board.27 

Such a structure would, of course, have removed 

much of the administration’s control over the RTC 

and was therefore unacceptable to Treasury. 

By mid-July the FDIC had become somewhat more 

conciliatory and proposed that the Oversight 

Board’s role in the formulation of policy be eliminated and, instead, that that body have the power 

to review RTC strategies and policies as well as to 

remove the FDIC from management of the RTC if 

the agency’s performance was unsatisfactory. The 

FDIC proposals were provided to Sen. Donald 

Riegle.28 The administration, too, sent proposals 

to the Hill; David Mullins (Assistant Secretary for 

Domestic Finance) stated that the administration 

had now removed all ambiguity from its proposal.29 

After several days of continuing negotiation, Treasury and the FDIC finally concurred on a draft 

management agreement that was formally sent to 

Congress on July 20. By this time the administration might have realized that the RTC was likely 

to be a potential magnet for problems, and 

although sharing responsibility with the FDIC 

meant having less control, it also provided cover. 

One financial services industry official noted at the 

time that the administration had become “skittish” 

in reaction to the problems associated with creating a new entity out of whole cloth to deal with 

such a large problem and had decided that delegating RTC activities to the FDIC was preferable to 

having sole responsibility.30 In addition, the FDIC 

and its chairman were viewed very favorably, and 

the administration probably did not want to fight 

an even more public battle with the FDIC over the 

latter’s RTC role. 

The Treasury–FDIC agreement retained the 

administration’s three-person Oversight Board, 

chaired by the Treasury Secretary. The Board’s 

authority, however, was fundamentally changed: it 

was now to develop and establish overall strategies 

and policies in consultation with the RTC. These 

overall strategies and policies included general 

policies for case resolutions, disposition of assets, 

the use of private contractors, the use of notes, 

overall financial plans and budgets, and restructuring the 1988 FSLIC deals. In addition, the Oversight Board would review and approve any 

financing requests and would review regulations 

and procedures, but with an important exception: 

it would have no authority over case-specific mat25 Senate Committee on Banking, Housing, and Urban Affairs (1989b), 32.
 

26 L. William Seidman (1993), 199–200.
 

27 FDIC Board of Directors’ Minutes, June 27, 1989.
 

28 Ibid., July 12, 1989.
 

29 Thomas (1989c).
 

30 BNA’s Banking Report (1989d).
 

2005, VOLUME 17, NO. 2 24 FDIC BANKING REVIEW 
 

Politics and Policy: The Creation of the Resolution Trust Corporation 

ters involving individual case resolutions, asset liquidations, or the day-to-day operations of the 

RTC. The FDIC was to serve as the exclusive 

manager of the RTC but could be removed by the 

Oversight Board if its performance was unsatisfactory. The FDIC Board of Directors would double 

as the Board of Directors for the RTC. Until the 

Oversight Board could establish policies, FDIC 

policies would govern the RTC.31 

Treasury had succeeded in keeping the FDIC 

Chairman off the Oversight Board, but the FDIC 

had limited the ability of the Oversight Board to 

intervene in RTC operations.32 Deputy Treasury 

Secretary John Robson predicted that the FDIC 

and the Oversight Board would work in concert 

but acknowledged that he was also expecting “the 

FDIC [to] initiate a number of policies.”33 The 

compromise created a bifurcation in authority, 

with the Oversight Board setting overall policies 

but the RTC making its own operational decisions. 

Potentially, such an arrangement could make management of the RTC unwieldy. 

The FDIC and Treasury arrived at this agreement a 

little more than two weeks before a final statute 

had to be crafted (if it was to be completed before 

the August recess—a deadline that no-one wanted 

to miss), so Congress had little time to intervene. 

One congressional staff member complained that 

first the administration was admonishing Congress 

to speed up and pass the bill, “then they throw a 

whole new draft at us.”34 Congress did not tamper 

with the agreement’s basic structure, but many legislators still felt that the nature of the RTC 

remained unclear. One attempt to clarify it was to 

require that the Oversight Board establish a strategic plan for conducting the RTC’s operations and 

submit it to Congress no later than December 31, 

1989.35 This requirement answered to the concern of some in Congress that the Oversight Board 

was an unaccountable entity. 

Originally the Oversight Board had simply been a 

group of high-ranking government officials with 

broad responsibilities, and the administration’s bill 

stated that the Board would not be considered an 

agency of the United States government, a status 

that left it free of all sorts of statutory requirements 

affecting the way in which it could act. But 

despite the administration’s general resistance to 

having constraints placed on this agency it was 

creating, by mid-July, in both the House version of 

the bill and in the Treasury–FDIC agreement, the 

Oversight Board had become an instrumentality of 

the U.S. government.36 

With regard to the membership of the Oversight 

Board, Congress insisted on nongovernmental representation and settled on a five-person scheme: 

the Secretary of the Treasury and the Chairman of 

the Federal Reserve remained; the Attorney General was removed in favor of the Secretary of 

HUD; and two independent persons to be chosen 

by the president and confirmed by the Senate 

completed the group. As had been the case from 

the beginning, the Secretary of the Treasury would 

serve as the Board’s Chairman. Although the 

administration did not favor independent members, both the House and Senate (at least partly at 

the urging of the real estate industry) had supported the idea, and since President Bush would nomi31 The agreement was in the form of statutory language and was provided to 

the House and Senate conferees to be considered for inclusion in Title V of 

FIRREA. The document dealt with many specifics, such as the exact 

corporate powers of both the Oversight Board and the RTC, compensation 

issues, the creation of the national and regional advisory boards, the 

development of policies and strategies for asset disposition, reporting 

requirements (both from the RTC to the Oversight Board and from the 

Oversight Board to Congress), legal issues such as the ability to sue and be 

sued, removal of actions from state courts, and so forth. See John E. 

Robson (Deputy Secretary of Treasury) and L. William Seidman (Chairman, 

FDIC) to Donald Riegle, Henry Gonzalez, Jake Garn, and Chalmers Wylie, with 

attached “Revised Version of Statutory Language Establishing the RTC” (July 

20, 1989). 

32 It should be noted that the Treasury–FDIC agreement also included some 

elements from the House and Senate bills, namely, specifying that the 

Oversight Board would be a body corporate with specific powers, establishing 

both national and regional advisory boards, and including at least some 

language about strategies for asset disposition. The agreement also included 

the House’s minority outreach program but, since the Oversight Board was no 

longer directly responsible for contracting, placed it within the RTC instead. 

33 Rehm (1989b), 1. 

34 BNA’s Banking Report (1989d). 

35 The plan would address 17 specific issues, including resolution practices, 

asset disposition, organization of the RTC, and minority outreach. 

36 In the Treasury–FDIC agreement, the Oversight Board had been specifically 

designated as not being an agency of the government. In FIRREA, the Board 

was an agency for the purposes of subchapter II of Chapter 5 and Chapter 7 

of Title 5 of the United States Code. Chapter 5 deals with the Federal 

Administrative Procedure Act and concerns issues such as public information, 

records, proceedings, and rulemaking. Chapter 7 provides for judicial review 

of agency actions. In FIRREA the Oversight Board was also an agency for 

purposes of the conflict-of-interest rules of Title 18 of the United States Code 

(see Chapter 11, on bribery, grafts, and conflict of interest). 

FDIC BANKING REVIEW 25 2005, VOLUME 17, NO. 2 
 

Politics and Policy: The Creation of the Resolution Trust Corporation 

nate the two individuals, the administration probably did not perceive this as an issue on which it 

needed to take a hard and fast position. 

In addition to its responsibility for setting overall 

policy for the RTC, the Oversight Board would 

approve RTC financing requests; establish the 

national and regional advisory boards; authorize 

the use of Resolution Funding Corporation (as 

noted above, a funding mechanism to be created 

by FIRREA) and Treasury funding; and could 

require the RTC to modify its rules, regulations, 

and guidelines. On the one hand, the administration retained a measure of control through the 

Oversight Board; on the other hand, by statute the 

RTC was given a much freer hand than the 

administration had originally intended. The real 

nature of the working relationship between the 

Oversight Board and the RTC (with the FDIC as 

its manager) was, however, an open question as the 

new entity began operations in August 1989. 

Later legislation would be required to clarify that 

relationship. 

Accountability 

The debate over the role and makeup of the Oversight Board was paralleled by discussion about the 

entity it was to oversee. As noted, some in Congress (and elsewhere) believed that, given the 

sheer volume and dollar value of assets involved, 

the RTC was destined to become a scandal of gargantuan proportions. Corruption, bribery, and 

favoritism, according to these observers, were likely to mar the RTC’s work and add to taxpayer 

costs. After all, just when FIRREA was wending 

its way through the legislative process, Washington 

was preoccupied by scandals involving the misuse 

of funds, the overpayment of consultants, and 

charges of political favoritism at the Department of 

Housing and Urban Development in the Reagan 

administration.37 Members of Congress, cognizant 

of the problems at HUD, were anxious to find 

ways to increase the RTC’s accountability.38 Significant mechanisms to ensure oversight and controls were therefore attached to the 

administration’s plan, although some legislators 

thought that even these changes did not go far 

enough (Rep. Toby Roth remarked that “two years 

from now . . . the RTC . . . will be a scandal so 

large that HUD will seem like a lemonade stand 

gone sour”).39 

Perhaps the most basic way in which Congress 

sought to impose additional oversight was by altering the legal definition of the RTC. This impetus 

came mostly from the House and has been mentioned above in connection with the Oversight 

Board. The president’s bill had stated that the 

RTC, like the Oversight Board, would not be considered an agency of the United States government. One House member suggested that the 

administration “wanted a body that was essentially 

undefinable, an entity that lives in the twilight 

zone between the public and private sectors.”40 

Such a declaration was undoubtedly somewhat 

overwrought, but those sentiments were reflected 

in the House’s decision to make the RTC—except 

when acting as conservator and receiver—subject 

to the Administrative Procedures Act and other 

laws.41 In opposing this change, one Treasury official argued that the more extensive the restrictions 

on the RTC, the more difficult it would be for that 

agency to “resolve institutions and dispose of assets 

in a cost-effective and non-controversial manner.” 

A further Treasury argument was that because the 

RTC had a very specific task and a limited life, 

subjecting it to the Administrative Procedures Act 

37 See, for example, House Committee on Banking, Finance and Urban Affairs,
 

Subcommittee on Housing and Community Development (1989). For a
 

detailed synopsis of congressional action on the problems at HUD, see
 

Congressional Quarterly Almanac (1990), 639ff.
 

38 HUD was explicitly mentioned in the conference report. See U.S. House
 

(1989c), 417.
 

39 U.S. Congress (August 3, 1989), H4966.
 

40 See Rep. William Gradison’s remarks, U.S. Congress (May 2, 1989), E1469.
 

41 House Committee on Banking, Finance and Urban Affairs (1989c), 352.
 

The Administrative Procedure Act, among other things, requires an agency to
 

publish rulemaking procedures and hold hearings or provide other means of
 

public comment on proposed rules, prescribes standards and procedures for
 

agency adjudications, and provides for judicial review for any persons
 

suffering legal wrong because of an agency action. Amendments to the law
 

include the Sunshine Act and the Freedom of Information Act.
 

2005, VOLUME 17, NO. 2 26 FDIC BANKING REVIEW 
Politics and Policy: The Creation of the Resolution Trust Corporation 

was inappropriate.42 The Senate, whose bill had 

followed the administration’s plan, accepted the 

House position in conference, and the position was 

included in FIRREA as enacted.43 

Some of the most significant elements of these 

laws addressed conflicts of interest, but Congress 

did not stop at simply making the RTC subject to 

the laws governing U.S. agencies—it also demanded specific actions beyond what those statutes 

required. Within 180 days, the Oversight Board 

and RTC had to set down rules at least as stringent 

as those applicable to the FDIC governing conflict 

of interest, ethical responsibilities, and postemployment restrictions. Any RTC CEO was subject to a one-year revolving-door provision 

preventing him or her from immediately turning 

RTC service into profit in the private sector. All 

RTC and Oversight Board employees from other 

agencies were to file with the RTC whatever 

financial disclosure forms those other agencies 

required. 

Because the RTC was to rely on the private sector, 

Congress was particularly concerned about potential abuses in contracting. The Oversight Board 

and the RTC were therefore required to create regulations on conflicts of interest and ethics for independent contractors, as well as on contractors’ use 

of confidential information. The Oversight Board 

would prescribe regulations establishing procedures 

to ensure that contractors met certain minimum 

standards. Contractors had to provide a description of any instance within the preceding five 

years in which the person, or the company under 

that person’s control, had defaulted on a material 

obligation to an insured depository institution. No 

one who had been convicted of a felony, or had 

been removed from or prohibited from participating in the affairs of an insured depository institution, or had demonstrated a pattern of defalcation 

regarding obligations to insured depository institutions, or had caused a substantial loss to federal 

deposit insurance funds, was to serve the RTC in 

any capacity. In addition, the Oversight Board was 

permitted to rescind contracts with individuals 

who fell into these categories, or who failed to disclose material facts, or who had been subject to a 

final enforcement action by any federal banking 

agency. Congress clearly sought to limit one perceived problem: the possibility that those who had 

helped create the S&L debacle through fraud or 

mismanagement would be able to profit from the 

cleanup. 

The House Financial Institutions Supervision, 

Regulation and Insurance Subcommittee also 

adopted an amendment that designated the RTC 

as a “wholly-owned government corporation.”44 

The House proponents of the amendment viewed 

this as an added precaution to ensure proper oversight of the RTC,45 but the administration successfully lobbied against this proposal, and the RTC 

was designated a “mixed-ownership” government 

corporation, a move denounced by Rep. Paul Kanjorski as “a fiction designed to exempt it from a 

host of . . . laws and safeguards.”46 Although the 

administration generally sought to keep the RTC 

free of encumbrances, “mixed ownership” was the 

designation of the FDIC, and the administration 

thought it made sense to have the RTC given the 

same designation as the FDIC, which would, after 

all, be operating the new entity. In addition, the 

GAO had specifically recommended that the RTC 

be created as a mixed-ownership corporation.47 

The precise ramifications of the mixed-ownership 

status (as opposed to wholly owned status) are 

unclear, for in fact no definition for these terms 

42 GBPL OA/ID 02054: Memorandum from Gregory P. Wilson through David 

W. Mullins, Jr., for Robert R. Glauber, April 20, 1989, 4. 

43 “Senate Offer on Selected Core Issues” (July 13, 1989), 19; U.S. House 

(1989c), 193. 

44 Rep. Paul Kanjorski put forward this amendment (BNA’s Banking Report 

[1989a]). 

45 U.S. House Committee on Banking, Finance and Urban Affairs (1989b),
 

442.
 

46 See U.S. Congress (April 3, 1989), H4993. See also Rep. Kanjorski’s
 

exchange with Treasury Secretary Brady in U.S. House Committee on Banking,
 

Finance and Urban Affairs (1989a), 39–40.
 

47 Letter from Comptroller General Charles Bowsher to Sen. Donald W. Riegle
 

(April 7, 1989), printed in U.S. Congress (April 19, 1989), S4274.
 

FDIC BANKING REVIEW 27 2005, VOLUME 17, NO. 2 
Politics and Policy: The Creation of the Resolution Trust Corporation 

exists.48 In general, mixed-government corporation status was believed to provide greater financial and accounting flexibility.49 

Congress also chose a more direct route to increase 

the RTC’s accountability: the imposition of very 

extensive reporting and auditing requirements.50 

Both the House and the Senate added these 

requirements, and for the most part the final 

statute reflected them. In debate on the Senate 

floor, Sen. Riegle noted that the Senate Banking 

Committee would be “very aggressive” in its oversight of the RTC and, through careful monitoring, 

would guard against the RTC’s not “follow[ing] 

through on the original legislative intent.”51 The 

GAO recommended reporting requirements to be 

certain the RTC “is accountable to the public and 

to Congress.”52 Since many of those in Congress 

who were skeptical of the how well the RTC 

would function believed that the administration 

had not sufficiently defined the way the RTC 

would work, Congress chose to carve out a substantial role for itself in the oversight of the RTC’s 

affairs, a role it did not later shrink from performing. Very soon after FIRREA was passed, the 

House Subcommittee on Financial Institutions 

Supervision created a separate RTC Task Force, 

something not mandated by FIRREA, to monitor 

the RTC, with Rep. Bruce Vento as its chairman.53 

The statute itself provided for an annual audit 

either by the Comptroller General or (in the event 

the Comptroller General declined to perform it) 

by an independent certified public accountant. 

The RTC and the Oversight Board were required 

to make all books and records available for this 

audit. The provision for the annual audit essentially mirrored the Senate version of the bill (the 

House bill would have required an annual GAO 

audit). The statute also called for the submission 

to Congress and the president of a full annual 

report of operations, activities, budget, receipts, 

and expenditures. In addition, there were to be 

specific semiannual reports to Congress, followed 

by appearances of the Oversight Board before the 

banking committees of both houses.54 The law 

also mandated that the Oversight Board and the 

RTC send representatives to appear before Congress to report on the RTC’s startup. On the 

House’s initiative, the statute established the position of Inspector General for the RTC and provided for the appropriating of funds for the office.55 

The administration does not appear to have 

opposed these kinds of requirements, at least some 

of which it may well have anticipated.56 

FIRREA also included various other mechanisms 

to ensure RTC accountability. The RTC was 

required to document decisions made concerning 

the solicitation and acceptance of offers57 that 

involved both the acquisition of troubled institutions or assets. Legislators wanted to ensure that 

RTC procedures provided for fair competition and 

48 Wholly owned and mixed-ownership corporations are simply enumerated as 

such in the Government Corporation Control Act (U.S. General Accounting 

Office [1995], 3, n.6). Basically, each government corporation’s enabling 

legislation may or may not enumerate that corporation’s relationship to 

existing laws; after reviewing the statute, each corporation decides just how 

it will operate. It is telling that in 1995, when the GAO sought to determine 

which laws government corporations adhered to, it surveyed them to find out 

what they did in practice. The RTC reported that it was wholly subject only 

to 3 of 15 statutes listed by the GAO, partly subject to 5 others, and not 

subject at all to the remainder, although it followed some of the other laws 

nevertheless (ibid., 123–29). (The RTC claimed it was wholly subject to the 

Government Corporation Control Act, the Inspector General Act of 1978, and 

the Ethics in Government Act of 1978; partly subject to the Privacy Act of 

1974, the Freedom of Information Act of 1966, the Federal Tort Claims Act, 

the Anti-Deficiency Act, and the Chief Financial Officers Act of 1990; and not 

subject at all to the Government in the Sunshine Act, Title 5: Employee 

Classification, Title 5: Pay Rates and Rate Systems, the Federal Property and 

Administrative Services Act of 1949, the Federal Managers Financial Integrity 

Act of 1982, the Government Performance and Results Act of 1993, and the 

Federal Credit Reform Act of 1978. However, some wholly owned government 

corporations were also not subject to these same laws (ibid., 34–35). A 

1981 study by the National Academy of Public Administration defined mixedownership corporations as those having a “combination of governmental and 

private equity” (National Academy of Public Administration [1981], 1:20). 

However, this definition does not apply to all mixed-ownership corporations. 

The FDIC, for example, repaid the government’s stake in its fund long ago. 

49 Moe (1995), 6, n.21. 

50 The administration bill eventually came to include reporting requirements 

for the RTC. These reports and audits were, however, designed to provide 

information for the scaled-down version of the Oversight Board (“Revised 

Version of Statutory Language Establishing the RTC,” 34). 

51 U.S. Congress (April 18, 1989), S4079. 

52 Comptroller General Bowsher to Sen. Riegle, U.S. Congress (April 19, 1989),
 

S4274.
 

53 McTague (1989).
 

54 The semiannual reports were to include statements of book value of assets,
 

total book value of RTC assets under private management, total book value
 

and sale value of assets during period, data on discounts from book value on
 

assets sold, list of areas designated as distressed and evaluation of markets
 

in those areas, staffing numbers, information on any change adopted by the
 

Oversight Board in a minimum disposition price, and the methods adopted by
 

the RTC to value assets and the reasons these methods were chosen.
 

55 House Committee on Banking, Finance and Urban Affairs (1989b), 443.
 

56 For example, the joint Treasury–FDIC version of the RTC portion of Title V
 

included the House provision for an IG (“Revised Version of Statutory
 

Language Establishing the RTC,” 38).
 

57 U.S. House (1989d), 413.
 

2005, VOLUME 17, NO. 2 28 FDIC BANKING REVIEW 
Politics and Policy: The Creation of the Resolution Trust Corporation 

the consistent treatment of qualified bidders while 

minimizing costs to the government. With regard 

to acquisitions, clearly the 1988 FSLIC deals were 

uppermost in the minds of legislators.58 One congressman who worked on this provision noted that 

“we need this type of information if we’re going to 

avoid the RTC repeating the December 1988 

deals.”59 The RTC was also required to publicly 

disclose any assistance transaction agreements and 

all agreements relating to 1988 FSLIC cases that it 

reviewed, unless the Oversight Board unanimously 

determined that disclosure would be against the 

public interest; all such transactions were, however, to be made available to Congress. 

The 1988 deals were responsible for a House provision designed to impose accountability on the 

RTC: the imposition of a cap on the issuance of 

RTC obligations. Banking Committee Chairman 

Henry Gonzalez argued that, without such a provision, “the [1988 FSLIC deals] could be repeated on 

a grander scale,” and stated that the RTC “should 

not hold a blank check on the U.S. Treasury.”60 

His solution was to limit the RTC’s total debt 

by creating a formula: the sum of contributions 

from the Resolution Funding Corporation (the 

RefCorp—the funding mechanism created by 

FIRREA) and the RTC’s outstanding obligations 

minus the sum of the RTC’s cash and the total fair 

market value of its assets could not exceed $50 billion. With the RefCorp originally envisioned to 

raise $50 billion, this would place a cap on RTC 

outstanding obligations equal to the sum of its 

cash, the fair market value of its other assets, and 

the balance of RefCorp bonds remaining to be 

issued. In addition, Rep. Gonzalez proposed other 

limitations on the RTC’s ability to obligate the 

government, including—with yet another glance 

at the 1988 deals—a prohibition against entering 

into any agreement that did not specify the maximum dollar amount for which the RTC would be 

liable.61 The amendment passed the House on a 

voice vote. 

The Senate had not included an obligations limit 

but accepted the House provision in conference 

and proposed that it be modified to conform to the 

Senate language limiting FDIC borrowing (this 

language prevented the FDIC from issuing notes in 

excess of 85 percent of the fair market value of 

assets and required the FDIC to include the estimated costs of any guarantees as a liability). The 

Senate applied the same rules to RTC borrowing 

but maintained the House language allowing RefCorp funding authority not to be treated as an 

asset subject to the 15 percent discount. The 15 

percent haircut was intended to provide a cushion 

against inaccurate or changing asset valuations. 

The Senate also extended the full faith and credit 

of the United States to RTC obligations.62 The 

administration had argued that Congress needed to 

give the RTC the flexibility to issue notes and 

guarantees for working capital, especially before it 

received RefCorp funds. If such a limit were 

adopted, it preferred that obligations be measured 

against the full amount of resources authorized to 

be available to the RTC (RefCorp contributions 

and assets acquired from insolvent thrifts) rather 

than that a 15 percent haircut be imposed on the 

fair market value of noncash assets.63 The Senate 

version of the limitation on obligations was included in FIRREA.64 

The note cap did end up placing potential constraints on RTC operations, but these went well 

beyond the constraints the administration had 

envisioned in criticizing the note cap. Within just 

a few months it became evident that the RTC’s 

need for working capital would push far higher 

58 Senate Committee on Banking, Housing, and Urban Affairs (1989b), 30–31.
 

59 Rep. David E. Price, U.S. Congress (June 14, 1989), H2568.
 

60 BNA’s Banking Report (1989b); U.S. Congress (June 15, 1989), H2749. 


61 U.S. Congress (June 15, 1989), H.2752.
 

62 “Senate Offer on Selected Core Issues,” 19. The FDIC supported the idea
 

of limiting the RTC’s ability to incur debt but opposed the House version,
 

saying that it was “so strict as to effectively prohibit the efficient functioning
 

of the RTC” (Climo [1989], 28).
 

63 BNA’s Banking Report (1989c). See also Rep. Chalmers Wylie’s statement
 

in U.S. Congress (June 15, 1989), H2751.
 

64 The note cap formula in FIRREA was as follows: (RefCorp contributions +
 

total outstanding RTC obligations) – (RTC cash held + 85 percent of fair
 

market value of RTC assets) could not exceed $50 billion. Full faith and
 

credit was extended only if the principal amount and the term of the
 

obligation were stated in the obligation. (This provision was therefore similar
 

to the House maximum dollar amount noted above.) The law also required
 

the RTC to estimate contingent liabilities quarterly and to include such
 

liabilities in financial statements.
 

FDIC BANKING REVIEW 29 2005, VOLUME 17, NO. 2 
Politics and Policy: The Creation of the Resolution Trust Corporation 

than the limit set by FIRREA. The law had provided the RTC with the ability to borrow $5 billion from the Treasury, but the RTC estimated it 

would need between $40 billion and $100 billion 

for working capital. Significant discussions during 

late 1989 and early 1990 were required to arrive at 

a solution: the RTC was allowed to borrow from 

the Federal Financing Bank to fund its working 

capital needs.65 

Legislative Management 

Imposing adequate accountability was only one 

way in which Congress tried to change how the 

RTC would work. Legislators also sought to intervene directly in the new agency’s operations. As 

was mentioned above in connection with the 

Oversight Board, Congress tried to impose direction on the RTC’s management by requiring a 

strategic plan. This idea originated in the Senate, 

where it was mostly tied specifically to asset disposition methods. Sen. Riegle noted that the strategic plan was included to address concerns about 

the effects of such massive asset sales, particularly 

in areas of the country where markets were already 

depressed.66 The Senate bill required the RTC to 

develop the plan, but when the role of the Oversight Board was redefined to focus on overall strategy and policy, the House–Senate conference 

placed responsibility for the plan with the Oversight Board instead. At the same time, the content of the plan was broadened significantly to 

cover almost every aspect of RTC operations. 

Although the strategic plan does fit under the 

rubric of legislative management, the actual implementation of the plan was still up to the RTC, 

under the supervision of the Oversight Board; and 

the statute did not spell out the role of the plan in 

the RTC’s operations. As things turned out, after 

the strategic plan was drafted it was rarely mentioned, but at the same time the RTC generally 

operated in accordance with it. 

Congress was more specific in insisting that the 

RTC use the private sector in carrying out its mission. Both the House and the Senate bill incorporated language to that effect, and there appears to 

have been little resistance to such provisions. Certainly use of the private sector dovetailed with the 

notion that the RTC would have only a short life 

and that a large new government bureaucracy 

would not be created. In addition, many believed 

the government had neither the manpower, nor 

the experience or expertise to handle asset disposition effectively. The author of the House provision, Thomas McMillen, stated that Congress 

needed to “set up a system designed to utilize the 

forces of free enterprise and market competition” 

as a way to get both high-quality service and cost 

competition; disposing of these assets would 

require entrepreneurial individuals with experience 

in business, finance, real estate, and accounting, 

and this was “not the substance of government” 

but was, instead, “the substance of [the] . . . highly 

competitive commercial marketplace.”67 Connie 

Mack, one of the authors of the Senate provision, 

stated that “private enterprise needs to be used to 

the fullest possible extent” and that the bill made 

clear Congress’s preference for the private sector to 

be used in management of the disposal of thrift 

assets.68 

Emphases did differ. For example, the House 

approach was more zealous, stating that the private 

sector should be used unless such services were 

unavailable, impracticable, or inefficient.69 The 

Senate, on the other hand, included a provision 

that the private sector should be used if such serv65 The debate over working capital lasted well into 1990 and was bound up
 

with the partisan politics of the budget; this issue is discussed fully in
 

Davison (forthcoming).
 

66 U.S. Senate (1989b), 334. This Senate version of the strategic plan
 

requirement called for the RTC to develop a plan and implement procedures
 

to maximize net present value return from assets, minimize disruption to local
 

real estate markets, and provide for an adequate level of capital for itself.
 

The plan was to provide for efficient disposition of assets, taking into
 

consideration market conditions, financing standards, asset values, expenses
 

and risks of holding assets, and so forth. Policies were also to provide for
 

adequate competition and fair and consistent treatment of third parties
 

seeking to do business with the RTC. See also U.S. Congress (April 18,
 

1989), S4075. The House also had a plan related to asset disposition but
 

called it a “business plan” rather than a strategic plan; it dealt with the
 

orderly disposition of assets in areas that might be adversely affected by
 

those transactions (U.S. House [1989b], 224).
 

67 U.S. Congress (June 6, 1989), H2341. He noted that his amendment was
 

“overwhelmingly adopted” in committee.
 

68 U.S. Congress (April 19, 1989), S4284.
 

69 U.S. House (1989b), 219. Rep. Thomas McMillen was responsible for the
 

language used in the House approach.
 

2005, VOLUME 17, NO. 2 30 FDIC BANKING REVIEW 
Politics and Policy: The Creation of the Resolution Trust Corporation 

ices were available, practicable, and efficient.70 In 

the Treasury–FDIC agreement of July 20, written 

with knowledge of the provisions already adopted 

on the Hill, the RTC was permitted to use the private sector if the services were available and were 

determined to be practicable and efficient.71 In 

other words, the administration, as always, sought 

to preserve flexibility. Ultimately the middle road 

of the Senate language was adopted, making it 

clear that the law intended the RTC to use such 

services but providing the new agency with discretion in choosing how to use them. 

Although use of the private sector to dispose of 

failed-institution assets was incorporated into the 

law, details about the asset disposition process 

received much more emphasis, with particular 

attention paid to the disposition of real estate 

assets. For example, the sole provision—it was 

originated in the House—that actually sought to 

define the internal organizational structure of the 

RTC required that the RTC establish a real estate 

asset division. The division’s purpose would be to 

ensure the “orderly disposition of real property 

assets by exercising primary responsibility over 

actions of conservators, receivers or managers of 

institutions with respect to the management, sale 

or disposal of real property assets.72 The division 

was specifically required to publish an inventory of 

real property assets of institutions under the RTC’s 

jurisdiction.73 Treasury apparently opposed the 

House’s provision in the belief that “the RTC 

should not be encumbered by legislative mandates 

as to operating structure.”74 The provision was, 

however, agreed to by the Senate in conference,75 

and it remained in the legislation as enacted. But 

the RTC’s organizational structure would undergo 

so many metamorphoses that this initial mandate 

was not particularly meaningful. 

Congress also believed that the RTC should consult with experts from outside the government on 

real estate assets and provided for the creation of 

advisory groups. To some extent this was a 

response to the urging of the real estate lobby, 

whose members were concerned about asset dumping and its effects on local markets. The Senate 

bill called for regional advisory groups and the 

House bill for both a national advisory board and 

regional boards. One observer noted that the 

advisory boards might be useful but that, if they 

were merely political entities protecting local 

interests, they would be ignored.76 And indeed 

Treasury initially opposed such groups not only 

because it saw them as reducing the RTC’s flexibility but also because it questioned their ability to be 

“sufficiently objective to support the best longterm solution to the overhang of properties in 

those local markets” (that is, in distressed areas).77 

However, the advisory boards were included in the 

Treasury–FDIC language sent to Congress in July, 

and the statute provided for both the national and 

regional advisory boards.78 The statute, however, 

placed no precise requirements on either the RTC 

or the Oversight Board for following the recommendations of these groups. 

Both the House and Senate did add prescribed 

goals for RTC asset disposition. First and foremost, 

the Senate bill, trying to dictate the rules under 

which RTC decisions would be made, required 

that the RTC obtain maximum net present value 

from assets under its control. Seeking to accom70 U.S. Senate (1989c), §501(v).
 

71 “Revised Version of Statutory Language Establishing the RTC,” 22.
 

72 House Committee on Banking, Finance and Urban Affairs (1989b), 440.
 

73 This inventory was to be published by January 1, 1990, and was to be
 

updated semiannually. This inventory was also to list properties with natural,
 

cultural, recreational, or scientific value of special significance. This was an
 

adaptation of a provision written by Sen. Tim Wirth and included in the
 

Senate-passed bill; Wirth’s approach would also have required that the list be
 

provided to appropriate federal and state agencies so they could act to
 

acquire the properties (U.S. Congress [April 19, 1989], S4252; Senate
 

Committee on Banking, Housing, and Urban Affairs [1989b], 204).
 

74 GBPL OA/ID 02054, 3.
 

75 “Senate Offer on Selected Core Issues,” 17.
 

76 National Mortgage News (1989a). It was noted that both the realtors and
 

the home builders supported the creation of advisory groups.
 

77 GBPL OA/ID 02054, 1–2.
 

78 Both types of advisory board were to be established by the Oversight
 

Board. The national board was to advise the Oversight Board on policies for
 

the disposition of real assets and was to consist of a chairman appointed by
 

the Oversight Board and the chairmen of any regional advisory boards.
 

FIRREA required the Oversight Board to establish at least six regional boards
 

(wherever it was determined that a significant real estate asset portfolio
 

existed) to advise the RTC on the disposition of assets. Each regional board
 

was to have five members, serving two-year terms but at the pleasure of the
 

Oversight Board, and the members were to be selected from among local
 

residents “who [would] represent the views of low- and moderate-income
 

consumers and small businesses” or who were knowledgeable about business,
 

finance, and real estate. All the boards were to meet at least four times a
 

year.
 

FDIC BANKING REVIEW 31 2005, VOLUME 17, NO. 2 
Politics and Policy: The Creation of the Resolution Trust Corporation 

modate real estate interests, the Senate qualified 

this by adding that the RTC should also minimize 

disruption to local economies. The House followed with similar language but added affordable 

housing provisions (see below). Again, the legislative proposal was colored by fears of asset dumping. 

The Senate Banking Committee mentioned its 

belief that HUD’s real estate auctions in Denver 

had depressed that city’s residential real estate market, and stated that it “expected the RTC to maximize net present value without damaging local 

markets.”79 Moreover, the committee added a separate provision that would prevent the RTC from 

selling real property assets in “distressed areas” 

(designated as Arkansas, Colorado, Louisiana, New 

Mexico, Oklahoma, and Texas, although the law 

also empowered the RTC Board of Directors to 

change these designations) for less than 95 percent 

of the market value established by the RTC.80 

Congressional alterations to the bill submitted by 

the administration thus began to include potentially contradictory goals and therefore began to blur 

the mission of the RTC. 

Treasury officials opposed such proposals as a “prescription for gridlock,” stating that “the overriding 

purpose of the RTC is to resolve failed thrifts and 

manage the disposition of assets in the most costefficient manner possible for the taxpayer. To do 

this the RTC requires flexibility, not a ‘straitjacket’ 

of conflicting objectives.”81 The administration 

took congressional opinion into account in the 

Treasury–FDIC agreement sent to Congress in July, 

which included a requirement for “the development of a business plan for the disposition of assets 

in geographic areas that might suffer significant 

adverse effects as a result of conditions in local real 

estate or financial markets.”82 All of the relevant 

House and Senate provisions, however, were 

retained in the legislation eventually enacted. 

Social and Public Policy Objectives 

Congressional concerns about asset disposition did 

not stop with questions of asset dumping and local 

markets but extended to the accomplishment of 

wider policy goals. In the case of asset disposition, 

the House added provisions to “provide homeownership and rental housing opportunities for lower 

income families.”83 (Affordable housing issues 

were also dealt with elsewhere in FIRREA.)84 

Reps. Barney Frank and Henry Gonzalez championed this idea, arguing that although the RTC 

needed to make maximum use of assets from failed 

institutions, such property ought not to be turned 

over to speculators at fire sale prices, further 

depressing local markets. Instead, true maximum 

value would be obtained by the use of residential 

property whenever possible to fulfill local housing 

needs.85 In the Senate, John Kerry, citing the 

same goals as Reps. Frank and Gonzalez, put forward a similar plan that was narrowly defeated in 

committee.86 

In the House bill, the chief mechanism for using 

the RTC to provide affordable housing was to 

grant qualified nonprofit organizations, public 

agencies, or lower-income families a 90-day right 

of first refusal to purchase residential properties. 

Originally this right was intended to apply to all 

RTC property (whether the RTC was acting as 

conservator or as receiver) with certain appraised 

values, and a proportion of all RTC property sold 

was to be reserved and maintained for this purpose 

(20 percent for “very low-income families” and an 

additional 5 percent for “lower-income fami79 Senate Committee on Banking, Housing, and Urban Affairs (1989b), 30.
 

80 Ibid. The committee noted that it did not intend its market valuation
 

requirement as a mandate to obtain an appraisal in all cases, countenancing
 

other valuation techniques when appropriate (and this flexibility was reflected
 

in the statute, which stated that the RTC was to “establish an appraisal or
 

other valuation method for determining the market value of real property”).
 

Treasury opposed this provision, noting that the RTC was being established
 

“precisely because of these distressed areas and the intractability of dealing
 

with their problems. To now burden the RTC with restrictions on its
 

activities in these areas is to severely compromise its operations and to
 

render superfluous its establishment” (GBPL OA/ID 02054, 2).
 

81 GBPL OA/ID 02054, 3.
 

82 “Revised Version of Statutory Language Establishing the RTC,” 27.
 

83 There were no comparable provisions in the Senate bill, although the
 

Senate Banking Committee noted that in certain cases sales to public housing
 

agencies might obtain true maximum value (Senate Committee on Banking,
 

Housing, and Urban Affairs [1989b], 30).
 

84 Title VII included a community investment program and an affordable
 

housing program through the Federal Home Loan Banks; Rep. Henry Gonzalez
 

sponsored these plans.
 

85 U.S. Congress (April 4, 1989), H914.
 

86 U.S. Congress (April 19, 1989), S4303. 

2005, VOLUME 17, NO. 2 32 FDIC BANKING REVIEW 
 

Politics and Policy: The Creation of the Resolution Trust Corporation 

lies”).87 If residential units were sold to a single 

organization, 20 percent of those units were to be 

reserved and maintained for very low-income families, and an additional 15 percent for lower-income 

families. Purchasers setting aside a higher percentage of units for such families were to receive preference among substantially similar offers. In 

addition, the RTC was to sell such properties 

under net realizable market value and was allowed 

to provide loans to purchasers at reduced interest 

rates to the extent necessary to allow a purchaser 

to comply with the lower-income occupancy 

requirements. The House also provided for assistance by HUD and the Farmers Home Administration (FmHA) by increasing the budgets for certain 

programs administered by the appropriate agencies. 

In subcommittee, Rep. Chalmers Wylie—a Republican acting on behalf of the administration—succeeded in changing the affordable housing program 

from a mandatory to a discretionary one, but Rep. 

Frank, partly by dropping the notion that a proportion of all RTC property would be reserved for 

lower- and very low-income families, succeeded in 

restoring it in full committee by a vote of 33–18.88 

In June the administration “urged the deletion of 

housing subsidies” to be provided by the RTC and 

the Federal Home Loan Banks under the bill. 

Congress, it was argued, should not “grant preferential rights to purchase assets of failed thrifts to 

any group” but, instead, should deal with affordable housing in separate legislation.89 Rep. Wylie 

stated that the RTC’s business was the disposition 

of real estate and that Congress could not “afford 

to tie the hands of the RTC with unwieldy, 

mandatory procedures.”90 Treasury officials had 

previously opposed the provision for RTC loans to 

purchasers of residential property, noting that making such loans was well outside the RTC’s primary 

mission and that there was no need for the RTC to 

compete with other credit providers in order to 

dispose of assets. Moreover, the officials believed 

that long-term lending was incompatible with the 

short-term life of the RTC.91 

The Senate, having voted down affordable housing 

provisions in committee, reversed course in conference. Although senators accepted the basic ideas 

put forward by the House, they wanted these 

refined in such a way as to ensure that the program 

did not “interfere with efficient asset disposition by 

the RTC, require the RTC to sell properties at 

below market prices, or provide below-market-rate 

financing.”92 Such a stance was much more in 

line with the administration’s position. The 

House–Senate conference made substantial 

changes to the residential properties disposition 

program, creating different rules for single and 

multifamily properties and clarifying the process 

for each. 

For single-family properties the RTC, “within a 

reasonable time after acquiring title,”93 was to give 

written notice to “clearinghouses”94 providing 

basic information about the property. These clearinghouses were to make the information available 

to other public agencies, nonprofits, and qualifying 

households, and the RTC was to provide reasonable access to the properties. For the three months 

after the RTC made an eligible property available 

for sale, the agency was to offer the property only 

to qualifying households, nonprofits, or public 

agencies that would either make the property 

available for occupancy by, and maintain it for 

occupancy by, lower-income families, or would 

make it available for such families to purchase. 

After the three-month period, the RTC could offer 

to sell to any purchaser. 

For multifamily housing, the RTC was again to 

provide written notice to the clearinghouses containing basic information about the property, as 

87 Very low-income families were defined as earning less than 50 percent of
 

median income, and lower-income families were defined as earning less than
 

80 percent but more than 50 percent.
 

88 See Pulles et al. (1989–98), 800–801. For the final version of the House
 

bill, see House Committee on Banking, Finance and Urban Affairs (1989b),
 

136ff.
 

89 BNA’s Banking Report (1989c). 

90 Wylie sought to reintroduce his amendment on the floor but was ruled out
 

of order (U.S. Congress [June 14, 1989], H2538).
 

91 GBPL OA/ID 02054, 3.
 

92 “Senate Offer on Selected Core Issues,” 7.
 

93 This was significant because, unlike the House language, it would not
 

apply to assets in RTC operating conservatorships.
 

94 Defined as state housing finance agencies, offices of community investment
 

within the Federal Housing Finance Board, and national nonprofit entities
 

selected by the RTC.
 

FDIC BANKING REVIEW 33 2005, VOLUME 17, NO. 2 
Politics and Policy: The Creation of the Resolution Trust Corporation 

well as reasonable access. Qualifying purchasers 

were allowed to give written notice of serious 

interest during the 90-day period after notice was 

provided to the clearinghouses or until the RTC 

determined a property was ready for sale, whichever came first. The RTC was then required to give 

notice to those who had expressed interest, after 

which those parties had 45 days to make an offer. 

Multifamily properties were subject to lowerincome occupancy requirements (at least 35 percent of units had to be reserved for lower-income 

families, and at least 20 percent for very lowincome families). The RTC could sell to other 

purchasers after the 90-day period if no qualified 

purchaser had expressed serious interest. The RTC 

was to give preference among substantially similar 

offers to those that reserved the highest percentage 

of units for lower-income occupancy. 

In addition, the conference removed the new 

funding (just over $500 million for fiscal year 

1990) that the House had included for HUD and 

FmHA financing, and replaced it with statements 

directing the relevant cabinet officials to provide 

expedited assistance to purchasers under laws 

already on the books. The conference also weakened the House’s requirements concerning sale and 

financing: the RTC, rather than being required to 

sell properties below the market price, was permitted to do so if that would facilitate the goals of the 

affordable housing program. Moreover, the RTC 

was again allowed—not required—to provide loans 

to purchasers at below-market interest rates in 

order to facilitate expedited sales to qualified owners. All these changes essentially reflected Senate 

positions.95 The law also provided for rent ceilings 

on multifamily properties for very low- and lowerincome tenant families. 

Although some of the more ambitious goals of 

House Democrats were not achieved in FIRREA, 

affordable housing provisions certainly made their 

mark on the statute, and even if the volume and 

number of assets in these programs would prove to 

be relatively small, the law nevertheless required a 

significant effort on the part of the new agency. 

The administration apparently did not think it 

advisable to make a stand on affordable housing, 

despite its view that the provisions were incompatible with the RTC’s mission. In any case, given 

that House Banking Committee Chairman Gonzalez backed the inclusion of affordable housing 

measures, compromise on this issue was probably 

necessary to ensure passage of the legislation. 

Congress sought to address another social policy 

goal through the RTC in another and very different way: by including minorities and women in the 

S&L cleanup process. The House bill required the 

Oversight Board to create a minority outreach program to ensure “inclusion, to the maximum extent 

possible of minorities and women, and entities 

owned by [them]” in all RTC contracts. The 

House bill contained another provision that called 

for the RTC to establish policies that “called for 

the active solicitation of offers from minorities and 

women” and specified reporting requirements that 

would detail the number of women and minority 

investors participating in the bidding for both 

acquisitions and assets.96 In the Senate, Alan 

Cranston had successfully put forward an “equal 

opportunity” amendment requiring that all the 

banking agencies, including the RTC, were to 

establish programs for soliciting business from such 

entities in their procurement programs.97 The 

Senate apparently was willing to accept the House 

provision for an outreach program led by the Oversight Board, but that provision was not included in 

the final law.98 Instead, policies on outreach programs were included in the required strategic plan; 

and the reporting requirements were retained, as 

was the general equal opportunity provision. Congress would, however, return to the subject of 

minority- and women-owned businesses in future 

legislation concerning the RTC, and the subject 

95 “Senate Offer on Selected Core Issues,” 8. 

96 House Committee on Banking, Finance and Urban Affairs (1989b), 126–27,
 

132, 143.
 

97 Senate Committee on Banking, Housing, and Urban Affairs (1989b),
 

289–90.
 

98 “Senate Offer on Selected Core Issues,” 18.
 

2005, VOLUME 17, NO. 2 34 FDIC BANKING REVIEW 
Politics and Policy: The Creation of the Resolution Trust Corporation 

would remain an important aspect of the agency’s 

political environment. 

Funding for the RTC 

The most contentious RTC-related battle between 

the Republican administration and the Democratcontrolled Congress was fought over the manner in 

which funding for the cleanup would be provided 

to the RTC. The RTC’s funding was entangled in 

the politics of the budget, and specifically in the 

constraints of the Gramm-Rudman-Hollings 

deficit reduction law (GRH).99 Once the amount 

of the funding had been decided, the method of 

providing the funding made no difference to the 

way in which the RTC would be structured or 

would operate. Nonetheless, the method generated 

heated rhetoric and threatened to delay or even 

scuttle the bill.100 

The administration plan provided $50 billion for 

the RTC to use in resolving insolvent institutions. 

The $50 billion would be raised through the sale of 

bonds by the RefCorp. This approach mirrored 

the one taken in 1987, when the Competitive 

Equality Banking Act established the Financing 

Corporation to issue bonds to raise funds to recapitalize the FSLIC. This approach also met the 

highly desirable (for the administration) goal that 

the spending on the RTC’s caseload would not 

increase the reported U.S. budget deficit (as Treasury funding would) and therefore would neither 

invoke sequestration under GRH nor require 

increased taxation to avoid sequestration.101 However, many Democrats and some Republicans questioned this course, preferring that Treasury provide 

the funds to close failing thrifts. 

The merits of on-budget versus off-budget financing became by far the most politically charged 

issue accompanying the creation of the RTC. 

Although Democrats in Congress undoubtedly 

pushed for on-budget financing as a way to embarrass the Bush administration by increasing the 

budget deficit in the face of Bush’s “no-new-taxes” 

pledge, the substantive argument put forward for 

on-budget financing was simple: RefCorp-issued 

bonds, because they would not be considered Treasury-backed securities, would carry a higher interest rate than Treasury obligations. Financing 

under the Bush plan would, therefore, be significantly more expensive than direct Treasury borrowing; the figure most often cited was 

approximately $4.5 billion over the life of the 

bonds. In addition, opponents of off-budget 

financing saw the plan as a dangerous precedent 

that would encourage future administrations to 

establish such entities as a way to avoid future 

budget targets. 

The administration argued that although there 

might be additional costs, they would be outweighed by the benefits of the off-budget 

approach. Administration officials stated that 

using $50 billion in Treasury funding but exempting it from GRH could push up domestic interest 

rates (possibly defeating the purpose of lowering 

the borrowing cost) because that action would 

cause domestic markets and foreign nations to 

question the U.S. commitment to lowering the 

budget deficit.102 The administration also argued 

that because the $50 billion principal of the 

RefCorp’s bonds would be financed by contributions from the S&L industry (the interest would 

be paid by the Treasury), treating the principal 

on-budget would be unnecessary. 

99 Its proper title was the Balanced Budget and Emergency Deficit Control Act 

of 1985; it was amended by the Balanced Budget and Emergency Deficit 

Control Reaffirmation Act of 1987. 

100 Throughout the RTC’s existence, the most acrimonious debates were 

engendered by funding. The legislative history of the agency—from FIRREA 

through the RTC Funding Act of 1990, the RTC Refinancing, Restructuring and 

Improvement Act of 1991, and the RTC Completion Act of 1993—is partly a 

history of the corporation’s funding, for each piece of legislation contained a 

funding component. The decisions made before passage of FIRREA set the 

terms of that funding history. 

101 GRH created “maximum deficit amounts.” If these were exceeded, the law 

mandated that the president issue an order (a sequester order) to reduce all 

nonexempt spending by the same percentage. 

102 See Thomas (1989a). See also Nicholas Brady’s testimony before in the 

House Committee on Banking, Finance and Urban Affairs (1989a), 26. The 

Congressional Budget Office (CBO) was among those suggesting direct 

Treasury borrowing and exemption of the spending from GRH. See House 

Committee on Ways and Means (1989), 237–40. But the CBO director, 

James Blum, also noted that this was fundamentally a political question that 

had to be decided by the president and Congress. Economist Martin 

Feldstein also supported the CBO’s position, arguing that the RefCorp should 

be scrapped in favor of direct Treasury borrowing but that the $50 billion 

could be exempted from GRH because the “rescue plan would neither 

increase aggregate spending nor crowd out any private borrowing” (Feldstein 

[1989]). 

FDIC BANKING REVIEW 35 2005, VOLUME 17, NO. 2 
 

Politics and Policy: The Creation of the Resolution Trust Corporation 

In the Senate, Banking Committee Chairman 

Riegle put forward his own financing design in 

opposition to the administration’s plan: he wanted 

Treasury to sell the bonds and then transfer the 

proceeds to the RefCorp. This would save money 

but still use the administration’s mechanism. (Of 

course, this plan ignored the fact that there was little point in creating the RefCorp if it simply funneled Treasury funds to the RTC.) Riegle avoided 

the GRH-mandated cuts by putting the entire cost 

into the current fiscal year (1989), where, for the 

purposes of GRH, it had no effect.103 This 

accounting procedure was fairly transparent, and, 

some argued, would make it plain that the U.S. 

government was willing to ignore budget discipline. Sen. Riegle’s amendment failed in committee by a single vote. Sen. Alan Dixon stated that 

although he believed the direct Treasury financing 

approach would reduce the cost of the cleanup, he 

voted against it in committee because the support 

required for passage on the Senate floor could not 

be obtained, and in his view the need to pass the 

bill outweighed the merits of Riegle’s plan.104 

Republicans noted that the threat of a presidential 

veto also influenced the committee’s vote.105 

Despite this setback, when the bill reached the 

Senate floor the Democrats renewed their efforts 

and again generated considerable debate. Republican Jake Garn probably captured the Senate’s true 

feelings when he remarked that neither of the 

funding mechanisms was particularly desirable and 

that “all of us would prefer to be someplace else 

doing something else” but that they needed to get 

the bill passed quickly.106 The Democrats’ plan 

fared better than it had in committee, but failed 

again. The vote was almost completely along 

party lines: only a single Republican voted for it, 

and only six Democrats against it.107 Once it 

became clear that the Treasury financing approach 

was doomed, however, senatorial pragmatism took 

hold, and the Senate overwhelmingly passed the 

bill with the administration approach intact, 

91–8.108 

Democrats in the House also sought to change the 

financing scheme. In the House Banking Committee Reps. Joseph Kennedy and John LaFalce 

both introduced amendments that would have 

used an on-budget, taxpayer-financed plan, a 

course that had no chance of succeeding. Because 

the House Banking Committee was not the appropriate venue for tax bills, these amendments were 

not even considered. The Ways and Means Committee was, however, the proper place for such 

bills, and the vote there was 25–11 in favor of Dan 

Rostenkowski’s plan for direct Treasury financing, 

but with the $50 billion exempted from GRH calculations.109 Partisanship over the funding issue 

was just as dominant in the House as it had been 

in the Senate, and only two Republicans on the 

Ways and Means Committee voted for this plan. 

When the on-budget financing plan came to a 

vote on the House floor, it was approved fairly easily, 280–146, but 251 of those votes came from 

Democrats.110 

The House–Senate conference eventually voted to 

use Treasury financing despite the administration’s 

intensive lobbying for the RefCorp plan.111 The 

Senate conferees had for some time supported the 

administration’s position, but Democrat Alan 

Cranston changed his stance, paving the way for 

the Senate to agree with the House.112 Although 

it was clear that the House would have supported 

103 OMB Director Richard Darman warned that if the Riegle plan passed, he
 

would apportion the $50 billion over a three-year period, adding significantly
 

to the deficit and possibly invoking across-the-board cuts under GRH (Nash
 

[1989c]). GRH was thought to apply to the upcoming fiscal year, not the
 

current year, and was based on estimates and not actual spending.
 

104 U.S. Congress (April 17, 1989), S4000.
 

105 See statements of Sen. Jake Garn and Sen. Kit Bond (U.S. Congress [April
 

17, 1989], S3997, S4001).
 

106 U.S. Congress (ibid.), S4009.
 

107 The vote was 50–48, but 60 votes were needed for passage because it
 

was a waiver to the 1974 Budget Act that would have increased outlays and
 

the deficit (Thomas [1989b]).
 

108 Nash (1989d).
 

109 Nash (1989e).
 

110 Rep. John LaFalce introduced a substitute amendment that, unlike Rep.
 

Rostenkowski’s, did not exempt the $50 billion outlay from GRH. Rep.
 

Rostenkowski and others strongly opposed this because it would almost
 

certainly have resulted in sequestration under GRH. Rep. LaFalce’s
 

amendment was defeated 256–171. U.S. Congress (June 15, 1989), H2730­

2747.
 

111 For example, on July 13 the president wrote to the leaders of the
 

conference asking them specifically not to use a waiver of GRH (Nash
 

[1989g]).
 

112 Nash (1989h).
 

2005, VOLUME 17, NO. 2 36 FDIC BANKING REVIEW 
 

 

Politics and Policy: The Creation of the Resolution Trust Corporation 

the conference report to use Treasury financing, 

the path in the Senate was much less certain. 

Republican Phil Gramm stated that since the 

financing provision of the bill involved a waiver of 

GRH, he believed that passage would require 60 

votes, and he and 40 other senators had informed 

Treasury Secretary Brady that they would not support the conference report.113 The president, several days later, informed Congress that he would 

veto the bill if it contained the Treasury financing 

proposal; the Senate, seeking to avoid this confrontation, then rejected the conference report, 

and the House and Senate conferees met again to 

reconsider the bill.114 

This stalemate over the funding issue prompted 

Bush aides to draft a presidential proclamation that 

would have forced Congress to forego its planned 

recess and convene to consider the bill. Bush’s 

planned statement would have stated that “delays 

necessary to craft the best possible solution are justifiable. The Congress’ plans for a summer recess, 

however, cannot justify an additional delay.”115 

The last president to actually invoke this constitutional power had been Harry Truman, when he 

ordered the “do-nothing” Congress into session in 

July 1948 to act on housing, civil rights, and price 

controls.116 As it turned out, Bush did not find it 

necessary to issue the proclamation, but its drafting 

underscored the seriousness with which completion of the legislative program was viewed. 

Informing Congress of the administration’s intent 

might have put enough additional pressure on 

Congress for that body to arrive at a compromise. 

The bargain that was reached essentially split the 

difference: $18.8 billion would come from direct 

Treasury borrowing on-budget, but for the current 

fiscal year (1989).117 For the purposes of GRH, 

this borrowing would have no effect (i.e., no 

potential for sequestration). The other $31.2 billion would be off-budget. Of this amount, $30 billion would be raised by the issuing of bonds 

through the administration’s proposed funding 

mechanism, the RefCorp.118 The other $1.2 billion would be contributed by the Federal Home 

Loan Banks to the RefCorp, which in turn would 

transfer the funds to the RTC. The last obstacle to 

FIRREA’s passage had been overcome.119 

Conclusion 

Although FIRREA established the RTC, it served 

only as the beginning of a structure and purpose 

that Congress would constantly examine, evaluate 

113 Nash (1989f).
 

114 Garsson (1989c).
 

115 GBPL FI002/070114: Memorandum from Nelson Lund, Associate Counsel to
 

the President, to James W. Cicconi, Assistant to the President and Deputy to 

the Chief of Staff, August 4, 1989. 

116 Presidential proclamations convening both houses of Congress under Article 

II, Section 3 of the Constitution have been made only 27 times. Twenty-three 

of the proclamations took place before the 1933 ratification of the Twentieth 

Amendment—thus, during the years when Congress was usually not in session 

between December and March. Although most presidential proclamations of 

this nature dealt with serious national crises, Truman’s decision in 1948 was 

essentially political, designed for use in the 1948 election. He actually made 

the announcement at the Democratic convention. See Hartmann (1971), 

192ff. 

117 The final version of FIRREA erroneously failed to include this $18.8 billion 

in the written formula for calculating the RTC’s obligation limitation 

(discussed above, p. 28). Since the RTC ran out of funds in late 1990 and 

Congress failed to act, this $18.8 billion “loophole” was used to allow the 

RTC to continue operations until Congress appropriated further funding. See 

Davison (forthcoming). 

118 For a discussion of the politics surrounding the compromise, see Knight 

and Downey (1989) and Nash (1989i). 

119 The second part of Title V of FIRREA established the Resolution Funding 

Corporation (RefCorp)—a one-time funding mechanism (future RTC funding 

would come directly from the Treasury)—as a mixed-ownership government 

corporation with the authority to issue $30 billion in bonds. The proceeds 

had to be transferred to the RTC through the purchase of capital certificates 

issued by the RTC. The RefCorp was under the authority of the Oversight 

Board and was governed by a three-person board of directors drawn from the 

presidents of the Federal Home Loan Banks (FHLBs). The corporation was to 

receive its funds from several different sources: the FHLBs, SAIF assessments 

on savings associations, earnings on its assets, RTC receivership proceeds 

(under certain conditions), the FSLIC Resolution Fund, and the Treasury. The 

FHLBs were required to pay the corporation’s administrative expenses; RTC 

receivership proceeds, the Banks, the FSLIC Resolution Fund, and (if these 

were insufficient) the Treasury paid the corporation’s interest expense. (Since 

the FHLB interest contribution was only $300 million per year, and the RTC 

and FSLIC Resolution Fund monies would only be used if a surplus was 

available, the Treasury would pay most of the interest expense.) The FHLBs 

were required to capitalize the RefCorp by purchasing RefCorp nonvoting 

capital stock (and the allocation of the capitalization among the FHLBs was 

set through a complex formula). The RefCorp was required to place the 

capitalization payments from the Banks into its principal fund, which would 

use the money to purchase zero-coupon U.S.-issued bonds, and these in turn 

would eventually be used to pay in full the principal of the RefCorp bonds 

upon their maturity. To the extent that the capitalization payments from the 

FHLBs as required by FIRREA were insufficient to fully repay the principal 

upon maturity, the RefCorp could make up the difference by using a portion 

of SAIF assessments on savings associations and receivership proceeds 

received by the FSLIC Resolution Fund. This description is largely based on 

Lescher and Mace (1991), 521–28. 

FDIC BANKING REVIEW 37 2005, VOLUME 17, NO. 2 
Politics and Policy: The Creation of the Resolution Trust Corporation 

and change. That process began even before passage: the final law, while certainly reflecting the 

administration’s basic concept for the RTC, also 

altered that concept in significant ways. First, at 

the urging of the FDIC, FIRREA made the RTC 

far more independent of Treasury control than the 

original plan had envisaged, with the Oversight 

Board, at least in theory, taking no part in day-today management decisions. Second, Congress to 

some extent modified the RTC’s purpose. In the 

administration’s plan the RTC’s mission was purely 

to resolve institutions and return assets to the private sector at the lowest cost; in the bill as enacted, a number of concerns that might conflict with 

those essential goals had been legislatively mandated—concerns such as affordable housing and limits 

on asset disposition in “distressed areas.” These 

mandates made for a more complex decision-making apparatus and hence a more complicated 

bureaucracy. 

Given the scope and character of the RTC’s business as well as the agency’s seemingly endless need 

for taxpayer dollars, it is not surprising that Congress—and the media—would find the RTC’s operations and management a convenient target for 

scrutiny and criticism. FIRREA did, however, set 

the parameters of the legislative changes that Congress would seek in later years: funding, organizational structure, management reform, 

accountability, and social policy would all retain 

their place in congressional debate and action concerning the RTC. 

Conclusions drawn about the creation of the RTC 

without reference to its later actions are necessarily 

incomplete. Some judgments are possible however. The administration deserves credit for confronting a difficult problem. It remains clear, 

however, that the use of the RefCorp as a financing vehicle, with its higher interest costs, should 

have been eschewed in favor of direct Treasury 

financing. This was purely a political decision, 

understandable in the context of the politics surrounding the deficit, but with no real benefits, and 

some very real costs. Another funding issue, 

though touched on only briefly in this article, 

should also be mentioned: a specific plan for providing working capital to the RTC ought to have 

been included in FIRREA. Leaving this detail for 

later led to delays and uncertainty. When we turn 

to the management of the S&L cleanup, it seems 

clear that management structures and responsibilities could have been better defined in FIRREA, 

though it should be acknowledged that what 

emerged at the end of the legislative process was a 

significant improvement over the highly imprecise 

nature of the initial proposals. The notion of an 

impossibly small RTC overseen by an Oversight 

Board that consisted of high officials whose main 

responsibilities lay elsewhere was impracticable. 

Deciding whether the grafting of social policy goals 

onto the RTC’s mission was a good idea or a bad 

one will likely vary depending on a rather subjective cost-benefit analysis. In the end, it is fair to 

say that the U.S. government was entering 

uncharted territory, and so it would be unrealistic 

to expect that the RTC would have sprung 

Athena-like, fully and perfectly formed from the 

legislative process. 

In closing, it should be noted again that the creation of the RTC would have been much more difficult without the existence of an organization 

similar to the FDIC. The latter provided two significant benefits; first, a foundation, notably in the 

form of a reservoir of relevant expertise, upon 

which the RTC could be built; second, a receptacle for the RTC’s unfinished business, and therefore the means by which the RTC could 

realistically be conceived of as having a limited 

lifespan—a characteristic that was politically very 

helpful for this new experiment in government. 

Appendix: The Federal Asset Disposition 

Association and the 1988 FSLIC Deals 

Two other significant duties of the RTC—aside 

from resolving failed institutions and managing 

and disposing of assets—were elements of the president’s bill and were retained, more or less intact, 

by Congress. They were designed to tidy up ancillary regulatory detritus. One of these additional 

2005, VOLUME 17, NO. 2 38 FDIC BANKING REVIEW 
Politics and Policy: The Creation of the Resolution Trust Corporation 

duties involved liquidating the FHLBB’s experiment in asset disposition, the Federal Asset Disposition Association (FADA); the other involved 

dealing with the much-criticized transactions 

entered into by the FSLIC in 1988. 

The FADA 

In the mid-1980s, as the problems within the S&L 

industry grew, the FSLIC had on its hands a growing inventory of troubled assets (more than $2 billion in late 1985) but lacked both the resources 

and the expertise to dispose of them. The FHLBB 

established the FADA as the solution to that problem, chartering it in November 1985 for ten years 

as a stock savings and loan association (wholly 

owned by the FSLIC), with the FSLIC providing 

$25 million in startup funds.120 This private corporation was to manage and dispose of assets more 

efficiently and effectively than either FSLIC staff 

or contractors had been able to, and would therefore (it was thought) produce substantial savings 

for the FSLIC.121 The FADA, however, did not 

deliver on its promise of savings (by 1988 it had 

lost approximately $15 million), and it was heavily 

criticized for failing to dispose of assets, growing 

too large, and overpaying its executives.122 Critics 

charged that the organization was unaccountable 

even to the FSLIC and that its management insisted it was a private entity even as the entity itself 

claimed governmental privileges.123 The FADA’s 

president and CEO, Roslyn Payne and her salary of 

$250,000 became a lightning rod for criticism.124 

In addition, private companies that were engaged 

in the asset disposition business wanted a bigger 

slice of that pie and were eager to see the FADA 

go. By late 1988, despite the appointment of a 

new CEO at a considerably lower salary, congressional detractors had drafted legislation calling for 

the FADA’s abolition.125 Few supporters of the 

organization remained as the new administration 

was putting together its draft for FIRREA, and 

since the RTC was to handle asset disposition, the 

organization was not only friendless but also redundant. 

The administration plan called for the RTC to 

manage the FADA and to sell it, wind it down, or 

dissolve it within 180 days. The Senate’s only 

change to this was to remove the 180-day requirement. The House, however, retained the 180 days 

and required that if the RTC chose to sell the 

FADA, it should do so through a competitive bidding process; the House also wanted to ensure that 

no contracts entered into by the FADA survived 

the organization’s dissolution or sale, and required 

that the FADA name could not be transferred to 

any purchaser. The House Banking Committee, 

perhaps in continuing dismay over the FADA’s 

failures and in response to the perception that 

FADA employees had been overpaid, noted the 

committee’s intention that no FADA employees 

be automatically transferred to the RTC; rather, all 

of them should have to go through the normal hiring procedures. However, only the prohibition on 

selling the FADA name remained in the conference report, and even this dropped out during the 

final negotiations. As enacted, FIRREA simply 

stated that the RTC was to liquidate the FADA 

within 180 days.126 

The FSLIC Transactions of 1988 

The flurry of transactions made by the FSLIC at 

the close of 1988, with their capital loss coverage, 

yield maintenance agreements, and tax benefits for 

acquirers, had become the target of congressional 

ire even before the president announced his plan 

120 U.S. General Accounting Office (1988), 16–18.
 

121 Payne (1986), 12–14.
 

122 House Committee on Banking, Finance and Urban Affairs, Subcommittee
 

on Financial Institutions Supervision, Regulation and Insurance (1987).
 

Moreover, the GAO issued a legal opinion that the FSLIC’s chartering of the
 

FADA was illegal (U.S. General Accounting Office [1988], 2–3).
 

123 For a discussion of the hybrid nature of the FADA, see H. Seidman (1988),
 

23–27, and Moe (1995), 22–26.
 

124 Taylor (1988a, 1988b).
 

125 For example, H.R. 4646, introduced in May, and H.R. 5521, introduced in
 

October. Both of these bills called for greater use of the private sector in
 

asset disposition.
 

126 U.S. Senate (1989a); Senate Committee on Banking, Housing, and Urban
 

Affairs (1989b), 200, 352; House Committee on Banking, Finance and Urban
 

Affairs (1989b), 134, 361, 444; U.S. House (1989d), 214. Although the
 

House provision about FADA contracts did not survive, it did not go
 

unnoticed. When the RTC was making its plan for liquidating the FADA,
 

Steven Seelig, head of the FDIC’s Division of Liquidation, noted that he had
 

recommended that the entity be sold without its management contracts and
 

stated, “It’s our belief that was Congress’s intent” (Harlan [1989]).
 

FDIC BANKING REVIEW 39 2005, VOLUME 17, NO. 2 
Politics and Policy: The Creation of the Resolution Trust Corporation 

to clean up the S&L mess.127 Members of the 

House Banking committee complained early in 

January that the FHLBB had exceeded its statutory 

authority in making the transactions, which were 

generally viewed as being far too generous to the 

acquirers of insolvent thrifts.128 FDIC Chairman 

Seidman, taking as his cue the gifts that banks in 

the past had bestowed on new depositors, 

described the transactions as “buy a toaster, get a 

thrift.”129 The administration’s bill responded by 

authorizing the RTC to review the terms of all 

FSLIC resolutions (from January 1, 1988, until the 

enactment of FIRREA) to search for ways of 

reducing costs under the FSLIC agreements, 

including by restructuring those agreements. If the 

Oversight Board agreed, the RTC was to pursue 

changes that would result in cost savings.130 

As Congress began to consider FIRREA, a GAO 

report issued in March claimed that tax benefits 

given to investors in insolvent institutions had frequently cost the government more than liquidating the thrifts would have cost.131 With opinion 

decidedly against the FHLBB’s actions, Congress 

developed a more definitive requirement about the 

1988 FSLIC transactions. The RTC was required 

to review all the cases, “actively review” all means 

of reducing costs under the existing agreements, 

and report to both the Oversight Board and to 

Congress. Costs were to be specifically evaluated 

in relation to capital loss coverage, yield maintenance guarantees, forbearances, and tax consequences; bidding procedures were to be examined 

to determine whether they had been sufficiently 

competitive. The RTC was to exercise all legal 

rights to modify, renegotiate, or restructure agreements if savings could be realized.132 Moreover, as 

an additional check and source of information, a 

House subcommittee amendment sponsored by 

Toby Roth added a provision requiring a GAO 

audit of all FSLIC resolutions from January 1, 1988 

through the enactment of FIRREA, and requiring 

a report to Congress estimating the costs of those 

resolutions.133 This provision, calling for review 

from a second source, illustrates the level of congressional distrust of the 1988 deals. 

127 For a detailed discussion of the 1988 transactions, see White (1991),
 

157ff.
 

128 See Nash (1989a); Hershey (1989).
 

129 Attributed to Seidman by Rep. David E. Price in U.S. Congress (June 14,
 

1989), H2568. In February, when the FDIC assumed responsibility for
 

insolvent FSLIC institutions, it effectively cancelled all negotiations for any
 

additional such deals (Nash [1989b]).
 

130 U.S. Senate (1989a), §501(f)(5). See also Garsson (1989a).
 

131 Rosenstein (1989).
 

132 U.S. House (1989d), 202–203.
 

133 The Senate had no such provision, but it was agreed to in the conference
 

(Pulles et al. [1989–98], 873). 

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Politics and Policy: The Creation of the Resolution Trust Corporation 

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Politics and Policy: The Creation of the Resolution Trust Corporation 

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