I want my, I want my, I want my RTC! (apologies to Dire Straits!). Yesterday, Nicholas Brady, Eugene Ludwig and Paul Volcker published an article in the Wall Street Journal entitled “Resurrect the Resolution Trust Corp.” This article makes the case for the establishment of a new, “temporary” credit crisis resolution mechanism. As Brady, Ludwig, and Volcker note, “There are precedents — such as the Resolution Trust Corporation of the late 1980s and early 1990s, as well as the Home Owners Loan Corporation of the 1930s. This new governmental body would be able to buy up the troubled paper at fair market values, where possible keeping people in their homes and businesses operating. Like the RTC, this mechanism should have a limited life and be run by nonpartisan professional management.”
Well, it appears that Messrs. Brady, Ludwig and Volcker may have gotten their wish today. According to a Wall Street Journal article entitled “U.S. Plans to Clean Up Finance System As Part of Widening Effort to Stem Crisis”, the federal government, “…is working on a sweeping series of programs that would represent perhaps the biggest intervention in financial markets since the 1930s. At the center of the potential plan is a mechanism that would take bad assets off the balance sheets of financial companies, according to people familiar with the matter, a device that echoes similar moves taken in past financial crises. It’s size could reach hundreds of billions of dollars.”
The stock market reacted very positively this afternoon to this news (with gains in the major indices ranging from 3.9-4.8%), and as I write this, stock futures contracts are also pointing toward a substantial continuation of this rally tomorrow. The main effect of this plan seems to be that it has assured investors that there is a plan in place for an orderly resolution of credit crisis. Markets hate uncertainty, and the rather ad hoc nature to date of the various US federal government interventions (e.g., involving Bear Stearns, Fannie, Freddie, and AIG) would now appear to be a thing of the past. Having said this, the amount of skin that the US taxpayer now has in the game has increased substantially. Before this news came out, the feds had already put around $800 billion of taxpayer capital at risk since March 2008 (putting this into perspective, this amounts to per capita contingent capital of nearly $2,700 for every man, woman and child living in the United States). It now appears that the level of contingent U.S. taxpayer capital committed to resolving the credit crisis has increased substantially!