Over the weekend, Treasury Secretary Henry Paulson sent a financial bailout proposal to the U.S. Congress that gives the Treasury Department broad authority to buy mortgage-related assets.
To calm the markets, step one is announcing a plan and proposing legislation to isolate and liquidate bad mortgages. But execution is the next challenge for the Bush administration, and it is no easy task if the record of our last real estate cleanup — the savings and loan crisis in the 1980s — is closely observed.
As many as 1,500 savings and loans went under during the country’s last financial and real estate debacle, and the U.S government lost $160 billion. Ultimately, a government-created entity, the Resolution Trust Corp. (RTC), sold off the bad real estate for as little as 10 cents on the dollar.
The overall record of the RTC is considered by most financial historians to have been a good one, but the first couple of years of the cleanup were bogged down in politics that should not be ignored this time around. Plus, the rush to liquidate the real estate, which the government acquired when a series of savings and loans went under with billions of dollars of insured deposits, may not have yielded the government the best return on its investment in the cleanup.
The RTC was not the first organization created to clean up the S&L mess. The first agency was called the Federal Asset Disposition Association, and its first CEO was Roslyn B. Payne, a very savvy San Francisco Bay Area real estate dealmaker with an MBA from Harvard.
After two years on the job, Payne was dumped, FADA was dissolved and the RTC was created, which stalled the emergency program.
At the time, Payne was allegedly the highest-paid executive on the federal payroll, which sparked a controversy even though she technically worked for a private company created by the Federal Home Loan Bank Board. Her salary was $250,000 a year: compare that to the compensation of a series of sacked Fannie Mae and Freddie Mac executives over the last five years.
The payroll controversy covered up deeper issues within FADA. While Payne was attempting to create a fair and competitive structure for letting go of property assets to get the best return for the federal government, some private contractors who wanted more of the disposition work were not happy with her and allegedly pressured the U.S. Congress to dismiss the female executive and kill FADA.
She got beat up by the media for her salary and the speed or care — depending on how you look at — that she was taking to sell the assets. Payne once walked off the set of an interview with CBS News.
She also came under political pressure by Congress. At the time, many members of Congress were knee-deep in the financial mess through their association with S&L executives. Who knows what Payne — known to be tenacious when it comes to details — might have uncovered in her diligence?
There are lessons to be learned here if political, government and private business leaders take the time to peel back the onion on the story behind the RTC.
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