Document Type

Case Study


The savings and loan (S&L) industry experienced a period of turbulence at the end of the 1970s as sharply increasing interest rates caused much of the value of the industry’s net worth to evaporate due to its focus on long-term, fixed-rate mortgages. As a result, a period of rapid deregulation followed, and S&Ls, also called thrifts, engaged in increasingly risky behavior despite many being clearly insolvent. This trend of yield-seeking growth on the part of zombie thrifts forced the government’s hand as huge losses rendered the insurance fund backing the industry, called the Federal Savings and Loan Insurance Corporation (FSLIC), essentially bankrupt. On August 9, 1989, the government passed the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), which abolished the FSLIC and created the Resolution Trust Corporation (RTC). The RTC had resolution and disposition authority over thrifts that had failed between January 1, 1989, and August 9, 1992 (subsequently extended first to September 30, 1993, and later to July 1, 1995). The government initially gave the RTC $50.1 billion in funding and the responsibility to manage tens of billions of dollars in failed thrift assets. Using a variety of resolution methods, such as purchases and assumptions, insured deposit transfers, and straight deposit payoffs, the RTC was able to successfully resolve 747 institutions, consisting of $455 billion (book value) in assets. These assets were often disposed of with methods ranging from direct sales, regional and national auctions, securitizations, and equity partnerships. Despite numerous concerns centered on gaps in its funding, inadequate internal controls, and problematic contracting procedures, the corporation managed a recovery ratio of approximately 85% from the disposal of these assets, and taxpayer losses amounted to an estimated $87.5 billion. The RTC shut down on December 31, 1995, and transferred $7.7 billion in remaining failed thrift assets to the Federal Deposit Insurance Corporation.