Implicit Liquidity Premiums in the Disposition of RTC Assets

Abstract

The Resolution Trust Corporation (RTC) was created by congressional legislation passed in 1989, and was charged with, among other things, the orderly disposition of other real estate owned (OREO) property. Questions have been raised about how efficient and effective the RTC has been in achieved its congressional mandate. One of the issues resulting from the efficiency question involves the amount of discount the RTC realizes for a quick disposition of the property. This study utilizes data provided by the RTC concerning its sales to analyze the implicit liquidity premium resulting from disposing of OREO. The results of the study indicate what variables contribute to liquidity premiums. This paper's importance relies most heavily on the finding that realistic market adjustments in regulation, over time, helped to achieve a higher degree of liquidity for RTC real estate property sales. The findings of this paper confirm the legislative intent of FIRREA, which is to ensure that real estate properties acquired by the government are disposed of at the highest dollar value possible.