Having worked with the RTC solution model as an agency staffer in the early 90’s, there really isn’t a better way to go this time, given the intense time constraints the Feds are operating under because the credit markets stopped working Wednesday. It’s the standard for “orderly disposition” of a mammoth pool of foreclosed asset value accumulated during a disorderly unwind of speculative excess.

From the foreclosure pov, it’s about a trail of ownership. Banks foreclose on the homeowner and transfer loans to REO (real estate owned), becoming the next owner. As a group, they are lousy landlords because it requires holding property, absorbing carrying costs and managing disposition of the assets efficiently, into a glutted market.

Banks are not property managers. So the property is slow to be disposed of and fees mount from contracted services for managing properties that go nowhere. Values continue to decline, balance sheets deteriorate and capital requirements are breached. At this point the bank fails and the Feds own some more real estate when the bank is seized.

The Feds are also poorly positioned to take on and manage real estate (no available staff to lead or manage it) and this gets you to the RTC model. Charter & capitalize a temporary federal agency to take charge of property transfer, management and disposition.

Costs are significant because it takes years and you are paying 3rd party private contractors to do a substantial amount of the work and their interest is in keeping the fees rolling. A large number of treasuries will be sold to fund the agency. Another way would be with independently issued New_RTC debt, backed by the US. This means the agency needs to be run with a surplus to service and repay the debt.

When the agency winds up its process after the assets have been disposed of and the REO inflow has ceased, your total cost is principally made of operating costs for the chartered agency and carrying costs to hold, maintain and auction the properties. The net margin (loss) on disposition of the assets dictates whether a surplus happens or how much.

The remarkable thing about this zero-hour unraveling so far has been the culprit. It wasn’t the people who panicked first, it was the banks who seized up, refused to lend on an even an overnight basis and stuffed their mattresses with cash.

In general, US business has some great balance sheets with lots of cash and little debt or low cost if it’s there. They are grinding through a contraction in demand that is repositioning itself to be based on incomes now, rather than debt. But they are well positioned for tight times.

The bankers however, have strung themselves up with counterparty risk they can’t even calculate – between themselves, not from consumers. So their solution is to just not lend to each other and watch themselves dry up and disappear.