Resolution Trust Corporation

The Resolution Trust Corporation was established in 1989 by the Financial Institutions Reform Recovery and Enforcement Act (FIRREA), and it was overhauled in 1991.

[3] In addition to privatizing, and maximizing the recovery from the disposition of, the assets of failed S&Ls, FIRREA also included three specific goals designed to channel the resources of the RTC toward particular societal groups.

The agency was slow to implement Minority and Women-owned Business (MWOB) and Affordable Housing programs.

While a number of different structures were used, all of the equity partnerships involved a private sector partner acquiring a partial interest in a pool of assets, controlling the management and sale of the assets in the pool, and making distributions to the RTC based on the RTC's retained interest.

Prior to introducing the equity partnership program, the RTC had engaged in outright individual and bulk sales of its asset portfolios.

Additionally, the equity partnerships enabled the RTC to benefit by the management and liquidation efforts of their private sector partners, and the structure helped assure an alignment of incentives superior to that which typically exists in a principal/contractor relationship.

The following is a summary description of RTC Equity Partnership Programs: Under the Multiple Investor Funds (MIF) program, the RTC established limited partnerships (each known as a Multiple Investor Fund) and selected private sector entities to be the general partner of each MIF.

The price was determined by the Derived Investment Value (DIV) of the assets (an estimate of the liquidation value of assets based on a valuation formula developed by the RTC), multiplied by a percentage of DIV based on the bid of the selected general partner.

For the N series, the RTC would convey to a Delaware business trust a pre-identified portfolio of assets, mostly commercial non- and sub-performing mortgage loans.

The class A certificate holder exercised those management powers typically associated with a general partner (that is, it controlled the operation of the trust), and the RTC, as the class B certificate holder, had a passive interest typical of a limited partner.

Because of the leverage, the amount required to be paid by the class A certificate holder on account of its interest was less than it would have been if the N-Trust had been an all-equity transaction.

There were nine S-series transactions, into which the RTC contributed more than 1,100 loans having a total book value of approximately $1 billion and a DIV of $466 million.

Furthermore, a third-party developer or financing source could acquire an equity interest in the special purpose entity in exchange for services or funding.

Net cash flow from the Land Fund was distributable in proportion to the respective contributions of the general partner (25%) and RTC (75%).

Land Fund general partners were joint ventures between asset managers, developers and capital sources.

The JDC program was different from the MIF, N/S Series and Land Fund programs in that the general partner paid only a nominal price for the assets and was selected on a beauty-contest basis, and the general partner (rather than the partnership itself) had to absorb most operating costs.

The RTC would convey to the limited partnership certain judgments, deficiency actions, and charged-off indebtedness (JDCs) and other claims which typically were unsecured and considered of questionable value.

It made payments to the RTC in the amount of one basis point (0.01%) of the book value of the assets conveyed.