WASHINGTON - The Resolution Trust Corp. recouped millions of dollars more by auctioning securities from failed institutions rather than selling them all to a broker, three economists found.
The study's authors, all former RTC traders, found that investment firms bid more for securities than the going market rate. If the RTC had contracted with a major securities house, such as Salomon Brothers Inc., the government would have recovered millions of dollars less from the liquidation of failed thrifts. The authors did not estimate an exact figure.
"You not only get more, but you make it available to a larger constituency of buyers," said one of the authors, Federal Deposit Insurance Corp. senior economist Peter J. Elmer.
RTC has auctioned $60 billion of securities since its inception in 1989. It normally invites up to a dozen firms to participate, often receiving sealed bids from about half.
The researchers found RTC earned more by targeting auctions at the parties most interested in a particular security.
"There is a lot of value to be gained by knowing your buyer and knowing the value of the asset being offered, and being sensitive to the market," Mr. Elmer said.
For some Small Business Administration-backed securities, that meant soliciting bids from some small firms, including one trader who works from a trailer in California, he said.
Mr. Elmer and the other authors, Prudential Securities vice president Eric J. Alini and Standard and Poor's managing director Frank Raiter, also said at a recent meeting of the Society of Government Economists that the RTC's policy of limiting the size of auctions produced higher prices.
Because so few secret bids were submitted, each of the half-dozen bidders believed he had a chance to win and thus were willing to invest the time and money to make a serious offer, the authors said.
They also found that large firms did not dominate the securities market. Firms with less than $20 million of assets secured about a third of all contracts, they found.