Can a New Resolution Trust Corp. Help Wall Street?

For much of the year, the government has responded to the markets' instability on a case-by-case basis. But after the latest round of lender anxiety—with Lehman Brothers left to collapse and AIG on the receiving end of an $85 bailout package—Treasury Secretary Henry Paulson admitted Thursday that more was needed. "We must now take further, decisive action to fundamentally and comprehensively address the root cause of our financial system's stresses," Paulson said in a statement circulated to reporters.

The plan announced by President Bush over the weekend: A $700 billion bailout package that would allow the Treasury Department to assume the bad mortgage debt that's infected financial institutions. Also up for debate, the creation of a new agency that might mirror the former Resolution Trust Corp. Its job, if it's created: to spot and catch companies before they begin to tumble. The RTC was the governmental response to the savings-and-loan crisis of the 1980s that allowed the government to sell off restructured loans gradually as the market stabilized and even improved, muting the effect on the economy and to taxpayers.

Whatever Paulson chooses to call it, a newly formed agency modeled on the RTC could prop up banks by taking on bad loans directly from lenders—at a much lower price. Relieving a bank of those mortgages would allow them to shed the dead weight currently dragging down the rest of the institutions. By taking over the loans, the government could also earn equity.

The prospect got a good reception from congressional leadership, with a handful of prominent lawmakers endorsing the plan as a stable and reasonable approach to the current market turbulence. But can a solution rooted in the 1980s be a relevant remedy to the current crisis? Harvey Pitt, who served as President George W. Bush's first Securities and Exchange Commission chairman, spoke with NEWSWEEK's Daniel Stone about how effective a similar entity could be. Excerpts:

NEWSWEEK: Do you think Paulson ' s ready to revive an RTC-like agency to deal with the current financial crises?
Harvey Pitt: I think so. I think there's a need for more infusion of capital in the system and the economy for it to become better oiled. So I think some agency intervention of limited duration is probably inevitable. And I think there are also ways in which I think we should get private capital into the system.

What were the real lessons of the first RTC?
One of the most important things that needs to be done is to make certain that government funds are not put at risk any more than is absolutely essential, and that efforts be made to try and find private-sector financing. Second, there has to be a fair assessment of particular situations. We can't have whoever is running this agency doing it in a way that doesn't play close attention to the fact that not all assets need to be propped up. Some assets ought to be capable of being sold over time. [We have a lot of potential approaches] to make sure. My hope is that we'll build up all that and proceed. [There also needs to be] good cooperation between the government and the private sector.

Alan Greenspan called the current situation the worst since the Great Depression, which certainly makes [today ' s mess] worse than the savings-and-loan crisis of the 1980s. How is the context different today?
I think the context is very different in this sense: what we're seeing is really an expression of panic. It's not based on fundamental values. It's purely based on timing of capital, which right now is very important. A lot of these assets were capable of being held, so they should be capable of delivering real value. If they don't, then they'll be worthless. I think some of what you had in the securities and loans crisis were people being wholly undisciplined and buying assets that had no hope of achieving any real value.

Is the legacy of that program, which in large part was a success, influencing whether it's a good idea to mimic now?
The old saying is correct. If you don't learn from history, you're doomed to repeat it. We learned from history a number of mistakes that hopefully we won't repeat.

Like what?
I think first of all, having no one really accountable, not paying close attention to the kind of spurious assets people invested in. There were serious deficiencies during that period. I think selling things will be needed as an orderly disposition. But we also need a disposition that recognizes some of these assets will need to be held for a while, and there's nothing wrong with that.

What were some of the mistakes from that a new entity should be avoid?
I think what you need probably more than anything is to have very able businesspeople with vast experience and training experience to handle the disposition of these assets. Otherwise, I'm afraid that the effort will wind up costing everyone more money. As I say, I think there are some valuable assets here. The trick is to distinguish between the good and the bad and the ugly.

Do you think a new RTC is a reasonable approach to the current problem?
We need to do something and something like the RTC might really be the most beneficial. So yes, I think this is the right direction here.