Goldman, RTC Deal Falls Apart : S&L; crisis: Controversial sale of $2 billion worth of properties to the firm collapses, but it will still reap millions in fees.

A controversial federal sale of $2 billion worth of real estate in California and elsewhere to a Wall Street investment firm with close ties to the Clinton Administration has collapsed after a congressional investigation, according to a new government report.

But the investment firm of Goldman Sachs will still reap up to $12 million in fees this summer from the Resolution Trust Corp., the federal agency handling the S&L; mess. The money will be partial payment for Goldman Sachs’ role in a complex S&L; transaction that investigators have concluded was a costly mistake for the government.

The report on the investigation, conducted by the General Accounting Office, the investigative arm of Congress, has not yet been made public. The inquiry was prompted by a story about the Goldman-RTC deal last year in The Times.

Robert Rubin, who was co-chairman of Goldman last year at the time of the original transaction, is now chairman of President Clinton’s National Economic Council and is a key player in Administration economic policy-making. The GAO found, however, that Rubin was not directly involved in the RTC transaction while at Goldman. Rubin could not be reached for comment Wednesday.

The GAO report is highly critical of the RTC’s handling of the deal, which agency officials said last year could have cost as much as $150 million of the taxpayers’ money if it had been completed.

“It appears the RTC may have used questionable judgment in structuring terms and conditions” of the deal, the GAO report said. The GAO added that RTC officials now agree that the arrangement was badly flawed. “RTC officials told us that, given the problems, they do not plan to (make similar deals) in the future.”

Congressional critics also charged Wednesday that the Goldman arrangement laid bare the RTC’s incompetence. The case also raised even more questions about the RTC’s ability to handle the massive job of selling the assets of failed savings and loans.

“You had RTC managers who didn’t know the first thing about selling real estate and they said, ‘Come fleece me,’ ” complained a Senate aide familiar with the Goldman deal. “These Wall Street people came down to Washington and mesmerized (RTC officials) with their talk about fancy deals that can make them lots of money.”

Congressional experts on Wednesday also criticized the agency’s decision to give Goldman millions of dollars in fees to make up for profits lost after the original deal fell through under public pressure.

The original deal was arranged during the Bush Administration, but the GAO said that Goldman will not receive its fees until this summer.

“It’s disgusting to me,” said Rep. Bruce F. Vento (D-Minn.), a senior member of the House Banking, Finance and Urban Affairs Committee who, along with Sen. Donald W. Riegle Jr. (D-Mich.), chairman of the Senate Banking, Housing and Urban Affairs Committee, ordered the GAO investigation.

“You would think that good judgment would prevent this, but it doesn’t. It’s pretty clear that big contracts like Goldman Sachs have got (the RTC’s) number.”

Gaston Gianni, associate director of the GAO who conducted the investigation, said the Clinton Administration still has time to renegotiate the agreement on the fees with Goldman.

The deal between the RTC and Goldman had its origins in the 1989 failure of City Savings, a large New Jersey thrift with nearly $10 billion in assets.

The RTC, fearing that an outright liquidation of the S&L; might lead to a panic among depositors in other thrifts in the New York area, sought instead to sell off its branch offices and its assets to other banks and financial institutions.

But City Savings was in such bad shape that the RTC had to sweeten its sales pitch to attract potential buyers by offering to throw into the deal the right to buy high-quality properties from other seized S&Ls; as well. As a result, in May, 1991, Goldman Sachs obtained an option to purchase $3 billion worth of high-quality residential mortgages from across the country from the RTC.

But in early 1992, the RTC was unable to find enough high-quality real estate assets in its massive inventory to satisfy its option contract with Goldman. That occurred because those assets were being sold rapidly by RTC officials on the open market.

So the RTC agreed to turn over lower-quality properties, including $1 billion from Florida Federal Savings, a Florida thrift seized by the government in August, 1991.

RTC management in Washington, hoping to complete the Goldman deal quickly, then ordered officials in its Costa Mesa office to turn over the final $2 billion to Goldman in the form of properties from seized thrifts in California and other western states.

But that arrangement would have given Goldman the right to purchase properties at prices far below the rates that RTC officials in Costa Mesa and the agency’s Denver regional office knew they could obtain on the open market.

In fact, officials in the RTC’s Denver office were in the midst of preparing the properties for sale on the open market, and were stunned when they were ordered to turn the real estate over to Goldman in a non-competitive deal at bargain prices. RTC officials estimated that Goldman would reap a windfall of about $150 million after it then turned around and resold the properties on the open market.

The Goldman deal sparked a rebellion within the RTC, especially in the Costa Mesa and Denver offices. John Sayre, then a property sales manager in the RTC’s Denver office who objected to the deal, charged Wednesday that he was forced out of the agency as a result.

“We were objecting in our office to these sweetheart transactions,” said Sayre, who provided information about the deal to The Times last year.

But publicity about the deal in the spring of 1992, followed by the GAO investigation, forced the RTC and Goldman to alter their agreement. The GAO report said that by September, 1992, the RTC was demanding that Goldman pay the same prices for properties under the agreement as the agency could obtain if it sold the assets on the open market. Goldman rejected that demand, and the deal for the final $2 billion fell apart.

The Goldman deal was just one in a series of huge, bulk property sales at bargain-basement prices that the RTC crafted in 1992 as the agency’s management rushed to complete its task of disposing of assets seized by the government from hundreds of failed S&Ls.;

Critics charged that the policy of selling properties in bulk at low prices meant big profits for a handful of large investors and ultimately meant lower returns for taxpayers. As a result, the Clinton Administration has issued a new policy prohibiting bulk property sales in packages larger than $50 million.

But after the Goldman property sale fell through, the RTC still agreed in October, 1992, to give Goldman Sachs a partial reward. Instead of turning over properties directly to Goldman, the RTC agreed to award Goldman the right to take on the role of arranging and managing the sale of $2 billion in properties to other buyers.

That “underwriting” role for Goldman meant that the Wall Street firm would be virtually guaranteed between $8 million and $12 million in fees for handling the transactions. Normally, firms are selected to underwrite and manage property sales for the RTC through a competitive process.

The GAO said the property sales Goldman will manage are scheduled to take place this summer.

The GAO report said the RTC was not legally prohibited from assigning the sales and the resulting fees to Goldman Sachs and noted that Goldman was already pre-approved as one of nine firms qualified to handle such deals. The fees Goldman will receive are also in line with fees that the RTC would have paid other firms for such work.

But the agreement has raised questions about the way in which the RTC contracts with outside firms. Vento said he wants to push for legislation that would force the RTC to follow general government contracting and procurement rules. The agency is now exempt from such regulations.