Talk grows of need for US bad debt disposal agency
WASHINGTON, Sept 17 (Reuters) - Wall Street's turmoil and the Bush administration's erratic response are stirring interest in a potentially more decisive approach -- a temporary agency to dispose of the toxic debt instruments poisoning the system.
Various models -- the Resolution Trust Corp (RTC) of the 1980s and 1990s, as well as the Home Owners' Loan Corp and Reconstruction Finance Corp of the 1930s -- are being discussed by lawmakers, veteran regulators, academics and analysts.
"Planning should begin for such a possibility. I think that would be the last thing to do. But it may be something we have to do," said Moody's Economy.com Chief Economist Mark Zandi.
Three former federal officials, writing in The Wall Street Journal on Wednesday, called for establishing a federal entity that could trim "decaying tissue" from the market.
Former Federal Reserve Chairman Paul Volcker, former Comptroller of the Currency Eugene Ludwig and former Treasury Secretary Nicholas Brady said such a body could buy up troubled real estate debt to get credit markets working again.
Similar remarks came on Monday from House of Representatives Financial Services Committee Chairman Barney Frank, who said he could envision exploring an RTC-style solution to the market's troubles after November's presidential election.
"We now have a situation with the Bush administration ... They have now begun this pattern of ad hoc intervention," Frank said on CNBC television on Wednesday. "I don't think that's appropriate.
"We have to consider whether or not we need to create another entity ... There would be some sort of limitation in terms of time," said the Massachusetts Democrat, adding there is not yet a firm proposal for such an approach.
Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, said on Tuesday at a briefing with reporters that he would not oppose looking at the idea.
Top banking committee Republican Sen. Richard Shelby, of Alabama, told reporters: "That might be something we'd look at, because we're going to have a number of banks to fail."
The RTC liquidated almost $400 billion in assets from more than 700 insolvent savings and loans from 1989 to 1995.
But Stanford Group Co policy analyst Jaret Seiberg said the RTC model is a poor fit for today because it was established to dispose of assets the government obtained when S&Ls failed.
At the moment, he said, the government does not own the mortgages underlying the broken debt instruments that are clogging up the credit markets. This troubled paper needs to be purchased by the government and taken out of the system.
"A closer analogy would be the Home Owners' Loan Corp (HOLC), which in simple terms is the Depression-era agency that issued bonds to refinance borrowers," Seiberg said.
The HOLC was set up by President Franklin Roosevelt in the 1930s to refinance homes to prevent foreclosures and to assist lenders by refinancing troubled loans and providing liquidity.
Brookings Institution economist Robert Litan said the Depression-era Reconstruction Finance Corp, which pumped federal money into private companies, could be a worthy model.
"It was not a dumping ground. It was basically an expanded version of what the Fed did with AIG," Litan said.
The government on Tuesday announced it would lend $85 billion to American International Group Inc (AIG.N) in exchange for an 80 percent stake in the insurer, in a move that was aimed at preventing the company's bankruptcy.
The AIG bailout was the latest in a series of emergency measures taken this year by the Bush administration, including the federal seizure of mortgage companies Fannie Mae (FNM.N) and Freddie Mac (FRE.N) and the government-engineered buyout of investment bank Bear Stearns by JPMorgan Chase & Co (JPM.N).
These moves, along with steps by the Fed to make more capital available to investment banks, have failed to stem growing market anxiety, with the Dow Jones Industrial Average down again by another 3 percent in afternoon New York Stock Exchange trading. (Reporting by Kevin Drawbaugh, additional reporting by Kim Dixon, Karey Wutkowski, John Poirier and Emily Kaiser; Al Yoon in New York; Editing by Tim Dobbyn and Gerald E. McCormick)
