US should create another RTC to unclog markets

The US government should create another RTC-style organisation for banks to unload their toxic real estate-related assets in a bid to help unclog the financial markets.

Philip Feder, global chair of law firm Paul Hastings’ real estate group, told PERE a failure by the US administration – and governments globally – to force banks to sell their bad assets in return for taxpayer capital infusions had led to a “classic stalemate” that was exacerbating the current market dislocation.

An entity similar to the Resolution Trust Corporation, created following the savings and loans crisis of the 1980s and 1990s to buy assets from failed institutions, would break the “log jam”, he said.

“Banks are getting very comfortable with their capital injections and they don’t feel the pressure to sell the troubled assets at a price that makes sense for buyers. That only leads to a vicious circle and could lead to stagnation,” Feder said.

“Private equity is going to be the buyers of these assets, they are the ones with the cash and they are poised to buy but they are not going to until banks and sellers get realistic on price,” he added.

Feder said private equity real estate was “eyeing the low hanging fruit” of real estate debt, in particular highly-rated debt with value-add and opportunistic-type returns and backed by “prime office buildings in prime metropolitan areas throughout the world.”

However the spread between the bid and ask was too large, he added, and without incentives banks would continue to sit on assets. “My real fear is that we have a situation such as that seen in Japan where nobody does anything, there is no activity in the market. That’s not what anyone wants,” he said.

William Kirsch, global chair of Paul Hastings’ private equity group, said banks had to be “spurred” into disposing of such assets as many sellers were “still hoping for a bounce” in the markets. “Expectations,” he added, “need to be adjusted.”

The US government’s $700bn troubled asset relief programme (TARP) was originally expected to buy billions of dollars of tainted mortgage-backed securities via auctions in a bid to unclog the markets. However, since September the programme has changed with billions of dollars invested directly into banks instead.