RTC Helps Own Cause by Putting Kibosh on Put Options
"Even Willie Mays got off to a rough start," says Anthony Scalzi, the RTC's director of resolutions and operations. Mays improved, and so has RTC performance.
June was the first month since it was established in August 1989 that total assets under Resolution Trust Corp. control dropped to $160 billion, from $166 billion at the end of May. Mr. Scalzi expects performance to continue to improve dramatically.
The RTC's biggest problem, until now, has been put-backs. Because many marketable assets have usually been sold before an institution enters RTC control, most of the assets retained by the RTC in receivership consist of lower-quality, less marketable assets. Acquirers have tended to "cherry-pick" the best of the lot and put the rest back to the RTC.
Even securities and performing one- to four-family mortgages were often put back: A substantial amount of the securities were junk bonds, and many of the one- to four-family mortgages were substandard loans.
Half of Put Options Used
For all resolutions through December 1990, acquirers of failed thrifts had returned almost half of the $36 billion in assets subject to put options. Adding returned assets to the assets retained by the RTC at resolution, the RTC was left with 70% of the resolved institutions' assets.
Some acquirers have not been interested in retaining RTC assets. First Gilbraltar of Texas put back virtually all of the assets it acquired from the portfolios of both Sooner Federal Savings and Loan Association and San Antonio Savings Association.
BankAmerica Corp. returned $1.6 billion in assets from the portfolio of Benj. Franklin Federal Savings and Loan Association of Portland, Ore., more than 60% of the assets subject to puts in a deal hailed last September as a model resolution. Almost two-thirds of the assets put back, $1.1 billion, were performing one- to four-family mortgages.
Buyers Become Scarce
At the opposite end of the spectrum, some acquirers put back less than 2% of assets purchased. Until recently, the RTC has tried to resolve its put-back dilemma by switch-hitting, first restricting put-backs, then sometimes liberalizing them.
Under the restrictive put-back policy adopted in August 1989, buyers were hard to find. Potential acquirers complained about shoddy documentation and inadequate time for due diligence.
In March 1990, the RTC tried to make troubled thrifts more attractive to potential purchasers by allowing more time for due diligence and liberalizing put-backs.
This policy ultimately failed for two reasons: cherry-picking and the deterioration of assets during the lengthy receiverships required by the bidding procedures in place at the time.
This spring, the RTC introduced new pricing procedures containing restrictive puts. The new policy is knocking assets out of the federal ball park. In June, of $10.4 billion in asset sales, only $400 million have been returned so far.
First, rather than giving potential buyers months to perform due diligence, RTC personnel are estimating the market value of assets as soon as an institution enters RTC control.
Based on its review, the RTC sets a fixed, minimum transfer price for assets - at an attractive discount from estimated market value. Bids under the transfer price are not accepted, but most bids come in over the minimum.
Second, as often as possible, the RTC accelerates resolutions. Under the Accelerated Resolution Program, institutions are closed without first being placed in conservatorship.
Third, under the new policy, no put-backs are allowed on performing one- to four-family mortgage loans that are passed with warranties. Put-backs on all other assets are limited to 60 to 90 days.
Money Can Be Made
"Acquirers can make money on these assets without cherry-picking," says Mr. Scalzi. "We price assets conservatively; with good management, they are worth more than the transfer price."
The RTC intends to resolve most of the institutions now in receivership under this policy, and Mr. Scalzi expects the average cost of RTC resolutions to continue to decline.
Mr. McRae is a contributing editor of Bank Mergers and Acquisitions, a newsletter published by SNL Securities. The data base and publishing firm, based in Charlottesville, Va., specializes in the banking and thrift industries.