Mere talk of a possible government solution to the credit crisis weighing down the U.S. and global markets provided enough hope to investors to support a mammoth rally in the U.S. stock market this week.
When the first reports of a federally funded bailout for the sector leaked Thursday afternoon, the market rallied large in the last hour of trading. The market expanded that rally Friday with gains large enough to effectively wipe out the week's earlier losses.
As Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke work with members of Congress over the weekend to hammer out specific details of the bailout plan, market player are already speculating about what the plan could look like and if it could really provide an effective solution to the financial crisis.
Essentially, the goal is for the government to take the bad debts that are weighing on these banks and liquidate these illiquid assets in an orderly fashion. And that has people who were around in the 1980s reminiscing about the so-called savings and loan, or S&L, crisis of that era and the aggressive way in which the government bailed out the that mess -- specifically, Resolution Trust Corporation, or RTC.So here's a simple FAQ on the '80s-era RTC and some thoughts on what a similar program could mean some 20 years later. What was the Resolution Trust Corporation (RTC)? The RTC was created following the savings and loan crisis in 1980s. The government inherited thousands of failed small banks and had to dispose of the real estate assets and mortgage-related loans of the thrifts. It originated as part of the Federal Institutions Reform and Recovery Act of 1989. Before the RTC was formed to deal with the mess, the Federal Savings and Loan Insurance Corporation (FSLIC) had closed 294 thrifts. What did the RTC do? The RTC provided two functions. It shuttered many of the failing institutions, which wound up totaling 747. The total amount of assets equaled $394 billion. It then liquidated those assets over a period of time until it was folded back into another federal agency -- the Federal Deposit Insurance Corporation (FDIC).