U.S. government's 1980s solution to credit crisis

The publicly-financed RTC was a government-owned, asset-management company created to liquidate the assets -- mainly real estate and mortgages -- of the hundreds of savings and loans companies which collapsed in the U.S. between the mid-1980s and mid-1990s.

These thrift companies had provided customers with both savings accounts and mortgages, profiting by lending money at much higher rates then the interest they paid out on their savings accounts.

The scheme worked until the end of the 1970s when it was thrown into disarray by two new factors: fierce competition among lending bodies to attract new customers by increasing interest rates on savings accounts and a new law which banned them from giving long-term, variable-rate loans.

When the Federal Reserve hiked short-term interest rates at the beginning of the 1980s to combat inflation, the companies fixed loans no longer raised enough cash to pay the interest due on their customers savings accounts.

Faced with the credit squeeze, the administration of then-president Ronald Reagan deregulated the market.

But instead of helping the savings and loans associations, deregulation only hastened their demise as they rushed to make up the shortfalls with excessive and increasingly risky loans and investments.

The Financial Institutions Reform, Recovery, and Enforcement Act of August 9, 1989, dramatically changed the savings and loan industry and its regulation.

It created the RTC to dispose of the assets of the failed institutions which had been taken over by U.S. regulators on January 1 of that year.

The RTC did this by setting up a number of equity partnerships with the private sector to liquidate the remaining assets of the savings and loans associations.

In some seven years, the RTC took under its wing some 747 savings and loans associations with about $394 billion in assets, according to the Federal Deposit Insurance Corporation (FDIC) which took over the RTC in 1995.

The RTC was financed by the Treasury and managed by a committee of five Treasury-appointed members and the chairman of the Federal Reserve.

Reports said Thursday that the US government was preparing the creation of a new entity to rescue troubled financial firms as the credit crisis roiled global markets.