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TheStreet Open House

Is a Resolution Trust Really the Answer?

Updated from Thursday, Sept. 18

The stock market surged Thursday on reports that regulators may establish a central holding entity for banks' troubled assets, but the proposed fix faces more complex challenges than it did when employed in the savings and loan crisis two decades ago.

Thursday evening, Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke emerged from a meeting with members of Congress with plans to work through the weekend on a fix for the bank crisis affecting U.S. and world financial markets.

In a statement, Treasury spokeswoman Brookly McLaughlin said Paulson, Bernanke and congressional leaders discussed a "comprehensive approach to address the illiquid assets on bank balance sheets that are at the underlying source of the current stresses in our financial institutions and markets."

McLaughlin didn't disclose details of any proposals.

The Wall Street Journal reports the plan would be similar to Resolution Trust Corp., which salved the wounds of the savings and loan crisis in the late 1980s.

However, the banking world has changed dramatically since that time and several factors may prevent an RTC redux from being a cure-all for the current malaise.

Resolution Trust Corp. was established in 1989 as a repository for the assets of hundreds of banks that failed in the preceding years. Another entity, the Resolution Funding Corp., provided financing for RTC's operations as it oversaw the liquidation of assets in an orderly manner.

The notion of an RTC solution for the financial sector today was first mentioned this week by House Financial Services Committee Chairman Barney Frank, D.-Mass. But his Senate counterpart, Chris Dodd, D.-Conn., indicated that such a solution would be a long time coming -- at least until after the November elections.

But on Thursday, as the markets wavered back and forth into negative territory, digesting the dramatic events of the past few weeks, CNBC reported that Paulson was formulating an RTC plan already. A call and email message to the Treasury to confirm the report was not immediately returned.

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