Return of the Resolution Trust Corp.? - What is it and Will it Help the Markets?

Remember: Never in the history, stock markets were driven by government legislation. Govt can’t bring back a bull market in stocks or an end to the recession.

Over the past few days, the markets have shrugged off the government’s bailout of AIG and a flush of liquidity from central banks around the world. No matter what the Federal Reserve or the US Treasury tried to do, they failed to please the markets.

However on thrusday, a possible resurrection of the Resolution Trust Corp (RTC) sent the stock market surging and gold prices plunging.

New traders may wonder what the RTC is and how it can help the markets.

• The RTC is essentially a government owned asset management company that is tasked with taking over and eventually liquidating faulty assets. It was first created as a result of the Savings and Loans crisis of the 1980s.
• It will work like this, take all the bad debts from financial institutions and leave the good debts or good loans/credits with them, so that bank or institution can recover smoothly, fall in their share prices will stop. Slowly when sentiments improves or when economy comes back to normal these bad loans are offloaded by RTC.
• Between 1989 and mid-1995, the Resolution Trust Corporation closed or otherwise resolved 747 thrifts with total assets of $394 billion.
• The idea was then floated around by current US Treasury Secretary Paulson, triggering the sharp reversal across the financial markets.

However the more important question to ask is whether or not an RTC will help.

• The problem in the financial markets right now is not with lending but with letting money go. No one is willing to take on risk, but if the RTC is willing to do so and keep it in house for a months or even years before liquidating so as not to flood the markets with bad assets, it can help.
• Hence, formation of RTC helps the market to recover because it will eat all the fear factor, but liquidity will be a concern which FED is going to inject or ensure.
• Question here is how long it will take for RTC to bring back the market to normal, as per our analysis it would take at least 1 years or more.

When RTC buys the bad debts, it accomplishes the following:

1. Restores Liquidity
2. Orderly Liquidation of Troubled Paper
3. Reduces Foreclosures because the Agency Would Manage Mortgage
4. Can Help to Revive Banks Stuck with Troubled Paper

-HBJ Capital Team