Congress is investigating charges that guarantees by the Resolution Trust Corp. on $7 billion in securities backed by commercial mortgages have exposed taxpayers to losses.
Some members of Congress are concerned that the guarantees and other moves by the Bush administration to rid itself of the thrift crisis by Election Day are resulting in needless risk and expense.
"We wanted them to sell in a hurry for a reasonable market price," said an aide to Rep. Bruce F. Vento, D-Minn. "But, my God, to put these [securities deals] together is ridiculous."
The congressional probe was sparked by complaints from investors who have been shut out of the RTC transactions because of securitization.
Buyers of whole loans from the RTC say the agency earns more on this type of sale than from repackaging the loans into securities.
The supply of whole loans dried up after April 10, when Lamar Kelly, RTC asset sales director, ordered that all performing loans be pooled and sold as securities.
In addition, securitization poses risks that sales of whole loans do not, these investors told congressional investigators.
Were Standards Met?
They say the RTC has guaranteed that the securitized loans were made in accordance with industry standards.
This guarantee may expose taxpayers to losses because the loans were made by thrifts that later failed. Presumably, some of these thrifts might not have followed accepted lending standards.
Investors in the securities are protected by reserve funds that a congressional analyst has said are seven times as large as needed to absorb the likely losses on the pools of loans.
But the analyst said the "reps and warrants," as they are called, could come into play if the agency sells the reserve fund, an option under consideration.
By selling the reserve fund, the RTC would be able to add 30% to 40% to the total it claims to have sold, thus resolving more of the S&L crisis.
But to make the reserve fund marketable, the RTC may have to guarantee investors against losses, critics argue.
Investors in the whole loans argue that Congress never authorized the RTC to use the full faith and credit of the U.S. government to back its securities, but that the agency has done just that through the back door.
Another complaint concerns the cost of the deals.
Robert Reischauer, director of the Congressional Budget Office, testified to the Senate Banking Committee last month that the interest and transaction costs of securitization have added $1 billion to the cost of the bailout, compared with what it would have cost to gold the assets against Treasury borrowings.
This estimate was for the costs of the RTC's entire securitization program, which includes about $13 billion of single-family residential loans in addition to the commercial real estate loans.
Sen. Jim Sasser, D-Tenn., a Banking Committee member who also chairs the Budget Committee, has asked the budget office to report back on what the government is getting for the additional costs - especially in light of the cash reserves and guarantees that leave at least part of the risk with the government.
Kenneth J. Bacon, who oversees the securitization program, dismissed concern over the reps and warrants by saying that the same guarantees would have been made in whole-loan sales.
The argument that the program is too costly compared with holding assets is flawed in two respects, he said.
"First of all, we're supposed to sell assets," he said. Besides, this criticism assumes the RTC can lock in today's favorable interest spreads.
By keeping the loans, "you have 100% of the risk," he said. "We have zero interest rate risk, and our credit risk is limited to the amount of the reserve."
Mr. Bacon said the RTC decided to securitize the loans because "we had performing loans that were not getting a good price."
He said the securitization program had been contemplated for some time and was not an election-year gambit.