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S. HRG. 111–320

COMMERCIAL REAL ESTATE

FIELD HEARING
CONGRESSIONAL OVERSIGHT PANEL
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION

HEARING HELD IN ATLANTA, GEORGIA, JANUARY 27, 2010

Printed for the use of the Congressional Oversight Panel

(

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COMMERCIAL REAL ESTATE

S. HRG. 111–320

COMMERCIAL REAL ESTATE

FIELD HEARING
CONGRESSIONAL OVERSIGHT PANEL
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION

HEARING HELD IN ATLANTA, GEORGIA, JANUARY 27, 2010

Printed for the use of the Congressional Oversight Panel

(
Available on the Internet:
http://www.gpoaccess.gov/congress/house/administration/index.html

U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON

55–522

:

2010

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For sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800
Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

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CONGRESSIONAL OVERSIGHT PANEL
PANEL MEMBERS
ELIZABETH WARREN, Chair
RICHARD H. NEIMAN
PAUL ATKINS
DAMON SILVERS

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J. MARK MCWATTERS

(II)

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CONTENTS
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Statement of:
Opening Statement of Elizabeth Warren, Chair, Congressional Oversight
Panel ..............................................................................................................
Statement of Kasim Reed, Mayor of Atlanta .................................................
Statement of Paul Atkins, Member, Congressional Oversight Panel ..........
Statement of Damon Silvers, Deputy Chair, Congressional Oversight
Panel ..............................................................................................................
Statement of J. Mark McWatters, Member, Congressional Oversight
Panel ..............................................................................................................
Statement of Richard Neiman, Member, Congressional Oversight Panel ...
Statement of Jon Greenlee, Associate Director, Division of Banking Supervision and Regulation, Board of Governors of the Federal Reserve ....
Statement of Doreen Eberly, Acting Atlanta Regional Director, Federal
Deposit Insurance Corporation ....................................................................
Statement of Brian Olasov, Managing Director—Atlanta, McKenna, Long,
and Aldridge ..................................................................................................
Statement of David Stockert, Chief Executive Officer, Post Properties ......
Statement of Chris Burnett, Chief Executive Officer, Cornerstone Bank ...
Statement of Mark Elliot, Partner and Head of the Office and Industrial
Real Estate Group, Troutman Sanders .......................................................
Statement of Hal Barry, Chairman, Barry Real Estate Companies ............

(III)

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ATLANTA FIELD HEARING ON COMMERCIAL
REAL ESTATE
WEDNESDAY, JANUARY 27, 2010

U.S. CONGRESS,
CONGRESSIONAL OVERSIGHT PANEL,
Atlanta, GA
The Panel met, pursuant to notice, at 10:04 a.m. in room 132,
Georgia Institute of Technology, 85 Fifth Street, NW, Atlanta,
Georgia 30308, Elizabeth Warren, Chair of the Panel, presiding.
Present: Elizabeth Warren [presiding], Damon Silvers, Richard
Neiman, Paul Atkins, and Mark McWatters.
Index: Elizabeth Warren, Damon Silvers, Richard Neiman, Paul
Atkins, and Mark McWatters.
OPENING STATEMENT OF ELIZABETH WARREN, CHAIR,
CONGRESSIONAL OVERSIGHT PANEL

Chair WARREN. This hearing of the Congressional Oversight
Panel will now come to order. My name is Elizabeth Warren. I’m
the Chair of the Congressional Oversight Panel. I’d like to start
this morning by thanking Georgia Tech for the use of the facilities,
and I also want to thank the staff of Congressman John Lewis for
working with us and with our staff in helping to plan this hearing.
I am joined this morning by the rest of our panel. The Deputy
Chair, Damon Silvers of the AFL–CIO, and then further down on
my left is Superintendent of Banking for the State of New York,
Richard Neiman. On my right is Paul Atkins, who a former Commissioner of the Securities and Exchange Commission, and on my
far right is Mark McWatters an attorney and certified public accountant. This is the full Congressional Oversight Panel. We are
glad that we can all be with you today to learn about commercial
real estate.
And I would like to start by recognizing the Mayor of Atlanta.
We are honored to have you here, Mr. Mayor, and hope that you
can give us some remarks to help us get started on this hearing.
Mr. Mayor.
STATEMENT OF KASIM REED, MAYOR OF ATLANTA

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Mr. REED. Madam Chair, distinguished members of the Panel,
welcome to Atlanta.
Good morning. It’s a pleasure to welcome you to our city and to
one of the nation’s premier institutions of higher learning, Georgia
Tech. I believe that Georgia Tech is an ideal environment for this
important panel to conduct its work. Problem solving is indeed
etched into its culture. Known for educational excellence and aca(1)

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demic rigor, the solution to many, many tough problems have been
conceived on this historic campus. It is my sincere hope that this
tradition will continue as some of our country’s greatest tests face
us right now.
As a newly elected mayor, I am especially grateful that the Congressional Oversight Panel has chosen our city as the site for these
crucial discussions on the condition of the commercial real estate
market. Atlanta is a city whose fiscal ebb and flow is closely tied
to the fortunes of this sector of the local and national economy.
It is not news to anyone certainly in this room that our city has
been one of the hardest hit commercial real estate markets in the
United States. Commercial property values have seen sharp declines. Applications for new construction permits have fallen off to
the most alarming levels that I have seen in 50 years, and we have
had more than 30 banks fail in Georgia in the last two years. The
current rate of decline is untenable. I use the word untenable after
much consideration because a declining commercial real estate
market has a compounding impact on our city’s tax base, our employment levels, and the availability of affordable housing for our
families, and this threat to the vitality of our city, our nation, and
our state must be met with action.
That said, I do want members of this panel to know that the
scope of the challenges that Atlanta faces are substantial, but we
are willing to work as partners. Our citizens are uniquely aware
of the existing realities and the burdens to be born in order to turn
around our local, regional, and national economy, but we are also
very optimistic in our hope that there is an impending recovery.
And we know that your work is an important part of the recovery.
We hope that the solutions developed from today’s discussion will
play a role in the reversal of fortune within the commercial real estate market and, by extension, the larger economy.
Please know that in our city you have a partner who is willing
to work with experts from the public and private sector to stabilize
the various markets within our economy. Thank you for the opportunity to speak with you today, and may your hearings be just as
productive as they are necessary. Thank you, and welcome to Atlanta.
Chair WARREN. Thank you very much, Mr. Mayor. We appreciate
it. We are going to start with some opening statements from the
panelists and then we’ll call our first panel of witnesses. So thank
you, Mr. Mayor, for being with us.
Mr. REED. Thank you.
Chair WARREN. The Congressional Oversight Panel was established in October of 2008 to oversee the expenditure of the $700 billion dollar Troubled Asset Relief Program, or TARP, as it is commonly known. We issue reports every month on different topics,
mostly trying to evaluate the Treasury Department’s administration of this program and their efforts to stabilize our economy. As
part of our work, we travel from area to area to try to go to the
places that have been hard hit by various aspects of the financial
crisis. This morning we have come to Atlanta to learn more about
the wave of foreclosures and vacancies sweeping through your commercial real estate markets.

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To prepare for this hearing we did some research and what we
discovered was deeply disturbing. We learned that vacancy rates
for Atlanta retail and office space grew throughout 2009, eventually topping 20 percent. Commercial property values have declined
across the board and the price per square foot of office space has
fallen by 50 percent. These declines have severely threatened bank
balance sheets, contributing to the failure of 30 Georgia banks
since August of 2008, more than any other state in the nation.
Many experts believe that Atlanta’s experience could foreshadow
a problem that could echo across the country. Such a crisis could
cause damage far beyond the borrowers and lenders who participate in any one transaction. More empty storefronts means more
lost jobs, more lost productivity, and prolonged pain for middleclass families. Commercial loan defaults could lead to deep losses
for banks and potentially raise the specter of more taxpayer-funded
bailouts.
Foreclosures in apartment complexes and multifamily housing
developments could push families out of their residences even if
they have never missed a rent payment. And because the modern
financial industry is so deeply interconnected, a downturn in the
commercial credit markets could spread to the rest of our financial
system.
Against this backdrop, the Panel is holding today’s hearing to explore the troubles in commercial real estate. We hope that by
learning from Atlanta’s experiences, we may better advance our
oversight responsibilities and public understanding of this important problem. No one can predict the course that commercial real
estate will take. The problems appear at a time when banks are
already weakened by massive losses. So we need to closely examine
the stability of our banks.
For example, the stress test conducted last year examined financial institutions only through 2010. We ask the question how these
institutions will cope with a commercial real estate crisis that may
produce losses in 2011, 2012, and 2013. Whether or not Treasury
and Federal Reserve have fully examined this question and made
appropriate provisions will be a part of our oversight question. And
given that TARP itself is due to expire in October of this year, we
raise a question about how much TARP can do to address these
challenges.
We also note that commercial real estate poses particular threats
to small and midsize banks, which are often the key sources of
loans for commercial projects in their communities. Given these
smaller banks have never faced stress tests, how likely are smaller
financial institutions to survive a significant shock in commercial
real estate? How can the Treasury’s programs, which until now
have focused on supporting the very largest financial institutions,
provide adequate support to smaller banks? What are the implications for the FDIC if the rate of bank failures, already high, starts
to rise at a steeper rate?
These are hard questions, and we are grateful to be joined by experts who can begin to find the answers, including government experts representing the Federal Reserve, the FDIC, as well as local
bankers and investors. We thank you all for your willingness to
share your perspectives and we look forward to your testimony.

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The Chair calls on Mr. Atkins, if you’d like to make some opening remarks.
[The prepared statement of Chair Warren follows:]

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STATEMENT OF PAUL ATKINS, MEMBER, CONGRESSIONAL
OVERSIGHT PANEL

Mr. ATKINS. Thank you, Madam Chair, and thank you all for
coming today. And thank you, Mr. Mayor for your kind remarks
and welcome to the city. And thank you very much to the witnesses
who have come to appear before us today and share their insights.
I very much look forward to hearing from you today.
There is no question that commercial real estate in the U.S. experienced a boom in the last ten years just like in the residential
housing market. Business confidence was high. Risk capital was
available aplenty. The cost of money was low, even by historical
standards. So even what might have been marginal deals seemed
to have gotten done anyway. So too much money was chasing too
few deals.
I want to leave as much time as possible for the witnesses to
talk, so I don’t want to talk myself today. But the things that I
really am interested in hearing about from the witnesses, of course,
is the current state of the commercial real estate market here in
Atlanta and also in the United States as a whole. And the two aspects of that that are really crucial to me are, obviously, we have
a clear oversupply of commercial real estate space. But is our problem just a supply side one? What about the demand side? Obviously, we have been and are still going through economic issues on
the national level and even on the global level. And so some of
those economic problems, obviously, are affecting the demand for
commercial real estate space. People are reluctant to invest or take
on obligations of new loans or take on risk because of uncertainty
in the future. That has to do with microeconomic and macroeconomic regulatory and legislative issues, taxation, fiscal issues,
all those sorts of things, and I’d love to hear your perspective on
how those compare here in Atlanta and also the United States as
a whole.
So thank you very much, and I yield the balance of my time.
Chair WARREN. Thank you. Mr. Silvers.

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STATEMENT OF DAMON SILVERS, DEPUTY CHAIR,
CONGRESSIONAL OVERSIGHT PANEL

Mr. SILVERS. Thank you, Madam Chair. Good morning. Like my
fellow panelists, I’m very pleased to be here in Atlanta and grateful
for the help and the presence here today of Atlanta’s mayor, Kasim
Reed. I also want to extend my appreciation again for the assistance of the office of Congressman John Lewis, one of the people in
public life whom I admire most.
The Emergency Economic Stabilization Act of 2008, which gave
rise to TARP, sought to address both the immediate and acute crisis that ripped world markets in October of 2008 and the deeper
causes of that crisis in the epidemic of residential foreclosures. The
purpose of the Act was not to stabilize the financial system for its
own sake, but to do so in order that the financial system could play
its proper role of providing credit to Main Street. Since this panel
began its work a little more than a year ago, we have continued
to ask three questions. First, is TARP working effectively to stabilize the financial system? Secondly, is that same financial system,
as a result of TARP, doing its job of providing credit to Main

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Street, and, three, is TARP functioning in a way that is fair to the
American people?
Today’s hearing on the impact of difficulties in the commercial
real estate market is really about all three of these questions.
There is three-and-a-half trillion dollars in U.S. commercial real estate debt. Five hundred billion of that debt will mature in the next
few years. There was clearly a bubble in the commercial real estate
values prior to 2008. We’ve heard already a fair amount about that.
But it is not clear the extent of the bubble. Meaning it’s not clear
how much of those—of those values were unsustainable and how
much was real. As a result, the return of commercial real estate
prices to levels that are supported by real estate fundamentals is
a potential source of systemic risk.
For example, recently Bank of America was allowed to repay
TARP funds in a manner that weakened its Tier 1 Capital ratios.
Meanwhile, here in Atlanta, Bank of America is dealing with large
commercial real estate problem loans in properties like Streets of
Buckhead, and it’s quite unclear what the outcome in those circumstances is going to be.
In addition, it is unclear whether the financial system as a whole
is healthy enough to provide financing for properties even when
they are properly priced, let alone financing for new development.
Finally, there is the question of the impact of the decline on commercial real estate values on smaller banks. This goes to the fairness point part of our mission. In Georgia there have been 30 bank
failures since August of 2008. These banks have gone through the
FDIC resolution process resulting, insofar as I know, their disappearance as independent entities.
The contrast between the impact of the financial crisis on small
banks and on very large failing financial institutions, that received
both extraordinary TARP assistance and assistance from the Federal Reserve System, appears to raise fundamental issues of fairness.
I hope in this hearing we will address these questions, and, in
the process, help the Panel to advise the Treasury Department and
Congress as to what steps, if any, need to be taken in the area of
commercial real estate. I do not believe it is either desirable or possible to prevent commercial real estate prices from returning to
sustainable levels. The goals here should be to ensure that the collapse of the bubble in commercial real estate has little, if any, systemic impact, that financing remains available for both existing
property and new construction that is rationally priced, and that
the federal government conducts itself in this area in a manner
that is fair to both small and big financial institutions and to communities where commercial real estate financing is vital to maintaining community vitality and jobs.
In reviewing the materials our staff helpfully provided for this
hearing and the testimony of our witnesses, I cannot help but be
struck by the contrast between the bonuses being announced this
week by the institutions the public rescued on Wall Street and the
unabated tide here in Atlanta and across this country of unemployment, residential and commercial foreclosures, and jobs that, not
only are lost, but not being created.

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President Obama has rightly asked the big banks to help pay for
TARP, but more needs to be done to restore fairness to our economy and financial system. I hope that this hearing can provide concrete ideas we can bring back to the Treasury and Congress for
how TARP can be managed to be part of the solution the Mayor
referred to earlier for communities like Atlanta. Solutions that lead
the financial system to play in its proper role as a creator and not
a destroyer of jobs and communities. Thank you.
[The prepared statement of Mr. Silvers follows:]

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Chair WARREN. Thank you, Mr. Silvers. Mr. McWatters.

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STATEMENT OF J. MARK McWATTERS, MEMBER,
CONGRESSIONAL OVERSIGHT PANEL

Mr. MCWATTERS. Thank you, Professor Warren. I very much appreciate the attendance of the distinguished witnesses that we
have today, and I look forward to hearing your views. In order to
suggest a solution to the challenges currently facing the commercial real estate or CRE market, it is critical that we thoughtfully
identify the sources of the underlying difficulties. Without a proper
diagnosis, it is likely that we may craft an inappropriately targeted
remedy with adverse, unintended consequences. Broadly speaking,
it appears that today’s CRE market is faced with both an oversupply of CRE facilities and an undersupply in prospective tenants
and purchasers.
In my view, there has been an unprecedented collapse of demand
for CRE property, and many potential tenants and purchasers have
withdrawn from the CRE market, not simply because rental rates
and purchase prices are too high, but because the business operations do not presently require additional CRE facilities.
Over the past few years, while CRE developers have constructed
new facilities, the end users of such facilities have suffered the
worst economic downturn in several generations. Any posited solution to the CRE problem that focuses only on the oversupply of
CRE facilities to the exclusion of the economic difficulties facing
the end users of such facilities appears unlikely to succeed. The
challenges confronting the CRE market are not unique to that industry, but, instead, are indicative of the systemic uncertainties
manifest throughout the larger economy.
In order to address the oversupply of CRE facilities, developers
and their creditors are currently struggling to restructure and refinance their portfolio loans. In some instances, creditors are acknowledging economic reality and writing their loans down to the
market with, perhaps, the retention of an equity participation
right. In other cases, lenders are merely kicking the can down the
road by refinancing problematic credits on favorable terms at or
near par, so as to avoid the recognition of losses and the attendant
reductions in regulatory capital.
While each approach may offer assistance in specifically tailored
instances, neither addresses the underlying economic reality of too
few tenants and purchasers for CRE properties. Until small and
large businesses regain the confidence to hire new employees and
expand their business operations, it is doubtful the CRE market
will sustain a meaningful recovery. As long as business persons are
faced with the multiple challenges of rising taxes, increasing regulatory burdens, enhanced political risks associated with unpredictable governmental interventions in the private sector, as well as
uncertain healthcare and energy costs, it is unlikely that they will
enthusiastically assume the entrepreneurial risk necessary for protracted economic expansion and a recovery of the CRE market.
It is fundamental to acknowledge that the American economy
grows one job and one consumer purchase at a time, and that the
CRE market will recover one lease, one sale, and one financing at
a time. With the ever expanding array of less than friendly rules,

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regulations, and taxes facing business persons and consumers, we
should not be surprised that businesses remain reluctant to hire
new employees, consumers remain cautious about spending, and
the CRE market continues to struggle.
The problems presented by today’s CRE market would be far
easier to address if they were solely based upon the mere oversupply of CRE facilities in certain well-delineated markets. In such
event, a combination of restructurings, refinancings, and foreclosures would most likely address the underlying difficulties. Unfortunately, the CRE market must also assimilate a remarkable
drop in demand from prospective tenants and purchasers with CRE
properties who are suffering a reversal in their business operations
and prospects.
In my view, the Administration could promptly jumpstart the
CRE market as well as the overall economy by sending an unambiguous message to the private sector that it will not directly or indirectly raise taxes or increase the regulatory burden of CRE participants and other business enterprises. Without such express action, the recovery in the CRE market will most likely proceed at
a sluggish and costly pace that may foreshadow the Secretary’s allocation of additional TARP funds to financial institutions that hold
CRE loans and commercial mortgage-backed securities.
Thank you for joining us today, and I look forward to our discussion.
[The prepared statement of Mr. McWatters follows:]

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Chair WARREN. Thank you, Mr. McWatters. Superintendent
Neiman.

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STATEMENT OF RICHARD NEIMAN, MEMBER,
CONGRESSIONAL OVERSIGHT PANEL

Mr. NEIMAN. Thank you. I am very pleased to be here in Atlanta.
Atlanta has a special meaning to me. I went to law school here at
Emory. I even started my career in bank regulation here in Atlanta
as an intern for the regional office of the control of the currency.
This hearing continues the Panel’s commitment to issues around
it, credit availability, community banking, and commercial real estate. It’s been six months since our first hearing on these issues,
which was held in New York City, and it is the right time to revisit
them.
New York has a unique concentration of commercial real estate
properties. But, as the recession has lingered, regional business
hubs, such as Atlanta, are under increasing pressure as well. Atlanta, in particular, experienced a surge in commercial real estate
development during the boom years. And from my days here in Atlanta, I vividly recall—in fact, I even worked at the Hyatt Regency
in the sky bar that went around the restaurant, around and
around. You could see the entire city, and now you’re looking probably at the thirtieth floor of the building next to you.
Now high vacancy rates for office space here are compounding as
a fallout from the financial crisis. Reevaluating the growing risks
in this sector is a top priority, and that is why commercial real estate is the subject of the Panel’s first hearing in the New Year.
Commercial real estate is not a boutique lending niche of importance only to a subset of lenders and borrowers. Commercial real
estate impacts every community on multiple levels, so understanding this sector is an important aspect of stabilizing our national economy.
When people think of commercial real estate they often just
think of properties, such as office buildings, shopping malls, and
hotels, but commercial real estate also includes multifamily and affordable housing units, from rental apartment complexes to condos.
This is the financing that provides accommodation for jobs, for conducting business, and for living.
I know that we will hear a lot today about the risk that troubled
commercial real estate loans present for bank balance sheets, and
that is certainly a critical consideration, particularly for me, as a
bank regulator. But financial stability begins and ends with the
well-being of our neighborhoods, and our families, and our national
economy. It is the health of our communities that is our ultimate
concern.
For multiple family buildings in particular, there is a concern
that the property’s condition will deteriorate as the owner’s cash
flow is diverted to making debt payments. Further, tenants who
pay their rent on time can find themselves homeless because their
landlord defaulted on the underlying commercial mortgage.
In New York we are developing progressive solutions that can
serve as models for stabilizing multifamily housing units nationwide. Foremost is Governor Patterson’s 2009 mortgage reform legislation, which provides new protections for renters when their

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landlord is in foreclosure. Our state housing finance agency is also
developing a pilot program to convert unused luxury units to affordable housing.
There is still another way in which commercial real estate intersects with people’s daily lives, and that is the impact of community
banks. Community banks not only provide a proportionately large
share of commercial real estate financing, they also are key sources
of credit to small businesses, an engine of growth for job creation.
We have seen growing numbers of smaller banks fail recently and
anticipate that this trend will continue. These small bank failures,
which could be increasingly driven by commercial real estate defaults, creates holes in our communities. Where there was once a
flourishing center for responsible hometown lending, there can be
a vacuum. This means less credit may be available for small businesses as well as for consumer lending.
The meltdown in residential subprime mortgages caught many
by surprise. But with commercial real estate we have more advance
warning of the scope and the magnitude of the developing problem.
It is my hope and intent that today’s hearing will not only assess
the magnitude of the problem, but will also explore potential market-based and public policy solutions. I look forward to your testimony and to your innovative ideas. Thank you.
[The prepared statement of Mr. Neiman follows:]

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20
Chair WARREN. Thank you Superintendent Neiman. We call our
first panel now. Our first panel, while they are taking their places,
I will go ahead and introduce them. Our first panel of witnesses
today will consist of government banking regulators from the Federal Reserve and the Atlanta office of the FDIC. And I’m pleased
to welcome Jon Greenlee, who is the Associate Director of the Division of Banking and Supervision for the Board of Governors of the
Federal Reserve System. Thank you, Mr. Greenlee. And Doreen
Eberley, the Acting Director of the Atlanta Regional Office of the
FDIC.
I am going to ask each of you if you would limit your oral remarks to five minutes, but we have read your testimony and it will
become part of the written record of this hearing. So with that, I
would like to present you Mr. Greenlee for five minutes.

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STATEMENT OF JON GREENLEE, ASSOCIATE DIRECTOR, DIVISION OF BANKING SUPERVISION AND REGULATION, BOARD
OF GOVERNORS OF THE FEDERAL RESERVE

Mr. GREENLEE. Thank you, Chair Warren, and members
Neiman, Silvers, Atkins and McWatters. I appreciate the opportunity to appear before you today to discuss trends in the commercial real estate sector and other issues related to the condition of
the banking system. Although conditions in the financial markets
continue to show improvement, significant stress remains and borrowing by business and households sectors remain weak. The condition of the banking system remains far from robust, loan quality
continues to deteriorate across many asset classes because of the
economic downturn, increases in unemployment, and weaknesses
in real estate markets. As a result, many banking organizations
have experienced significant losses and are challenged by poor
earnings and concerns about capital adequacy.
In Georgia, the performance of banking organizations has also
deteriorated. Like their counterparts nationally, banks in Georgia
have seen a steady rise in non-current loans and provisions for loan
losses, which have weighed on bank earnings and capital, and 30
banks have failed in the state since the turmoil in financial markets first emerged.
Substantial financial challenges remain, and, in particular, for
those banking organizations that have built up unprecedented concentrations in commercial real estate loans, given the current
strains in the real estate markets.
From a supervisory perspective, the Federal Reserve has been focused on CRE exposures for some time. In 2006 we led the development of interagency guidance on CRE concentrations to highlight
the importance of strong risk management over these types of exposures.
On October 30th of last year the federal and state banking agencies, including my colleagues at the FDIC, issued guidance on CRE
loan restructuring and workouts. This guidance is designed to address concerns that examiners may not always take a balanced approach to the assessment of CRE loans. One of the key messages
in the guidance was that for renewed or restructured loans in
which borrowers who have the ability to repay their debt according

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to reasonably modified terms, will not be subject to examiner criticism.
Consistent with our longstanding policies, this guidance supports
balanced and prudent decision-making with respect to loan restructuring and timely recognition of losses. At the same time, our examiners have observed incidents where banks have been slow to
acknowledge declines in commercial real estate cash flows and collateral values in their assessment of potential loan repayment.
As noted in the guidance, the expectation is that the bank should
restructure CRE loans in a prudent manner and not simply renew
a loan to avoid a loss recognition.
Immediately after the release of this guidance, the Federal Reserve developed an enhanced examiner training program and we
have engaged in outreach with the industry to underscore the importance of the principles laid out in that guidance.
Finally, in late November, the Federal Reserve’s TALF program
financed the first issuance of CMBS since mid-2008. Investor demand was high. And in the end, non-TALF investors purchased almost 80 percent of the TALF eligible securities. Shortly thereafter,
two additional CMBS deals without TALF support came to market
and were positively received by investors. Irrespective of these positive developments, market participants anticipate that CMBS delinquency rates will continue to increase in the near term.
In summary, it will take some time for the banking industry to
work through this current set of challenges and for the financial
markets to fully recover. The Federal Reserve is committed to
working with Congress and the other banking agencies to promote
the concurrent goals of fostering credit availability and a safe and
sound banking system. Accordingly, we thank you for holding this
important hearing, and I look forward to your questions. Thank
you.
[The prepared statement of Mr. Greenlee follows:]

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36
Chair WARREN. Thank you, Mr. Greenlee. Ms. Eberley.

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STATEMENT OF DOREEN EBERLEY, ACTING ATLANTA REGIONAL DIRECTOR, FEDERAL DEPOSIT INSURANCE CORPORATION

Ms. EBERLEY. Good morning Chair Warren and members of the
panel. I appreciate the opportunity to testify on behalf of the Federal Deposit Insurance Corporation concerning the condition of the
commercial real estate market in Atlanta and its impact on insured
institutions’ lending.
As you noted in your invitation letter, the real estate market in
the Atlanta metropolitan area has been hard hit. My testimony will
describe the factors that led to the difficulties in the Atlanta housing market and the manner in which those difficulties have translated to high levels of loan losses and bank failures. I will discuss
weaknesses we have started to see in the Atlanta area market for
other types of real estate, such as office, retail, hotel, and industrial properties. And, finally, I’ll describe the supervisory actions
regulators are taking to address these risks.
The Atlanta area was ranked first in the nation in single-family
home construction each year from 1998 to 2005. In response to an
increased demand for housing stock, residential development activity increased and many FDIC-insured institutions headquartered
in the Atlanta area exhibited rapid growth in their acquisition, development, and construction or ADC portfolios. This growth resulted in significant concentrations in ADC loans. The FDIC monitored the growth of ADC loans in the Atlanta area as it occurred
and attributed the growth to local institutions meeting the housing
needs of an increasing population. What was not really apparent,
however, was the increasing volume of subprime and nontraditional mortgage originations in the market. The increased availability of these types of mortgages turned out to be a significant
factor driving housing demand.
Demand for vacant developed lots in the Atlanta market collapsed shortly after subprime and nontraditional mortgage originations were sharply curtailed in 2007. The resulting imbalance between supply and demand has led to deterioration in the performance of residential development loans, which comprised the bulk of
the ADC portfolios of Atlanta area financial institutions. The impact of this deterioration has been magnified by the disproportionately high concentration of ADC loan lending. At year end 2007,
Atlanta-based institutions reported a weighted average ADC concentration that was nearly three times higher than that reported
by similar institutions in other metropolitan areas. Losses experienced by Atlanta banks on ADC portfolios have also been higher
than the national average, and poorly performing portfolios of ADC
loans have been a significant factor in recent bank failures. The 25
institutions from the Atlanta area that have failed since the beginning of 2008 reported a weighted average ADC concentration a
year before failure of 384 percent of total capital.
While Atlanta’s residential development market remains strained
with reports of a ten-year supply of vacant developed lots, weaknesses are now emerging in the Atlanta area market for other categories of real estate, such as office, retail, hotel and industrial

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properties. Atlanta ranks among the top ten markets, in terms of
vacancy rates across these categories. As a result, performance of
these loans has started to deteriorate.
Contrary, to what we’ve seen in ADC portfolios, loss rates and
non-performing rates experienced by Atlanta institutions for the
largest category of commercial real estate loans—those that have
non-farm, non-residential property as collateral—are comparable to
national averages. It’s not greater. Also, Atlanta area financial institutions are proportionately less exposed to this segment of the
market than it appears in other metropolitan areas.
In response to the risks in the Atlanta and other commercial real
estate markets, the FDIC has maintained a balanced supervisory
approach. We identify problems and seek corrections when there
are weaknesses, while remaining sensitive to the economic and real
estate market conditions and the efforts of bank management.
Through industry guidance we have encouraged banks to continue
making loans available to credit-worthy borrowers and to work
with mortgage borrowers that have trouble making payments; we
have required banks to have policies and practices in place to ensure prudent commercial real estate lending; and we have encouraged prudent and pragmatic commercial real estate workouts within the framework of financial accuracy, transparency, and timely
loss recognition.
Finally, we believe that financial reform proposals currently
under consideration can play a role in mitigating the types of risks
that have led to significant losses in the Atlanta market. For example, the FDIC believes that consideration of a borrower’s ability to
repay is a fundamental consumer protection that should be enforced across the lending industry. Establishment of such a standard at the federal level should eliminate regulatory gaps between
insured depository institutions and non-bank providers of financial
products and services by establishing strong, consistent consumer
protection standards across the board.
In addition, we support the creation of a process to oversee systemic risk issues, develop new prudential policies, and mitigate developing systemic risks. With the benefit of hindsight, it’s fair to
say that during the years leading up to the crisis, systemic risks
were not identified and addressed before they were realized as
widespread industry losses. The experience in Atlanta is illustrative. During the years of rapid ADC loan growth local financial
institutions and their supervisors did not fully appreciate the growing risks posed by the availability of subprime and nontraditional
mortgage products. Examples such as this underscore the benefit
of monitoring systemic risks to assess emerging risks using a system-wide prospective.
[The prepared statement of Ms. Eberley follows:]

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52
Chair WARREN. Ms. Eberley, that’s all for now.
Ms. EBERLEY. Thank you.
Chair WARREN. Okay. Thank you very much.
So we’re going to see if we can go through a round of questions
here. What I’d like to start with, since we have two people who supervise the regulators in front of us, is I’d like to talk a little and
ask them a bit about the role of the regulators in the run up to
this crisis. The rules governing lending, obviously, are going to be
critical in understanding the problem and trying to shape some
kind of solution.
Now, as I understand it, 2005, 2006 there was a significant deterioration in bank underwriting standards. In 2006, there was an
interagency guidance concerning risks to banks having large concentrations of commercial real estate, and the banks complained
about this guidance because it would have restricted the amount
of concentration that they could have had in lending, and, as a result, the guidance was changed. The regulations were, in fact,
weakened so that there was less regulatory oversight.
So what I’d like to start with is a question about the role that
the regulators played in the run-up to this crisis and maybe a
grade for how the regulators did. Mr. Greenlee.
Mr. GREENLEE. Thank you for that question. From our perspective, commercial real estate in particular, is an area that we’ve
been focused on for quite some time. We did identify building concentrations in the earlier part of the decade, and we got together
with the other agencies to try to find a way to make sure that as
banks were continuing to expand in that area and that they were
managing the risk associated with commercial real estate appropriately. And we issued the guidance in 2006 that you are referencing.
Chair WARREN. But the guidance, that was weakened when the
banks complained.
Mr. GREENLEE. We were trying to balance our guidance, in terms
of not, you know, overlaying too stringent of requirements on
banks, but allowing them to pursue their business plans.
Chair WARREN. So in 20/20 hindsight——
Mr. GREENLEE. At the same time make sure——
Chair WARREN [continuing]. How has that worked out for us?
Mr. GREENLEE. I think in 20/20 hindsight, you look back, and, as
we have mentioned in both our testimonies, the commercial real estate concentrations have become a significant problem.
Chair WARREN. What I’m asking about though is the role of the
regulators in those concentrations. The regulators had the power to
make sure that this didn’t happen. What went wrong?
Mr. GREENLEE. Our guidance was really aimed at trying to get
the banks to manage those concentrations in a more effective way.
Particularly through the use of stress testing to gain a broader understanding of what potential difficulties in the marketplace could
mean to overall bank solvency, and to have the banks take the responsibility for managing that risk in a prudent and effective way.
Chair WARREN. Let me switch then. Let me go to the current
context, since we’re going to be pressed on time. To what extent did
the banks, the current banks, recognize their commercial losses?
Are the losses now acknowledged on the books of the banks? Are

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53
the books of the banks reliable on the question of commercial real
estate losses, Mr. Greenlee?
Mr. GREENLEE. One of the purposes of the guidance that we
issued last October, as I mentioned in my statement, was that we
had come across incidents where banks were slow to recognize
losses. In some instances, banks had renewed and restructured
loans in ways that may not have increased the ability of that borrower to repay the loan in full. So, in part, we were trying to send
a message to the industry too that they need to recognize their
losses in a timely manner. Our——
Chair WARREN. My question is how much confidence do you have
that they’ve done that?
Mr. GREENLEE. For our examiners that is a main focus of their
onsite examination process. There are a few outliers, our supervisors are addressing them and making sure that the banks are
taking losses as appropriate.
Chair WARREN. I don’t think I’m hearing an answer though. Are
you confident that that has now been accomplished, that the books
accurately reflect the commercial real estate losses?
Mr. GREENLEE. As commercial real estate markets continue to be
under pressure, I think there could be more losses. Our examination process is designed to——
Chair WARREN. But you feel confident that they’re at least current today?
Mr. GREENLEE. I think in terms of individual, specific banks
there may be some question. As such, we continue our supervisory
efforts to make sure they are recognizing their losses. It’s a very
hard question to kind of answer in a broad way, because it is very
institution-specific as to whether or not the banks have good risk
management and loss recognition practices.
Chair WARREN. Ms. Eberley, I’m sorry, I didn’t mean to ignore
you during this.
Ms. EBERLEY. That’s okay.
Chair WARREN. We have such short periods of time. Would you
like to add to either one of those questions about the role of the
regulators or where we stand?
Ms. EBERLEY. Yes, I will. To the second question, I think that the
point that Mr. Greenlee is making is an appropriate one, that this
is an ongoing process for financial institutions. They’re required to
take a look at their loans on a regular basis as they do their call
reports to the federal regulators. Their financial statements every
quarter have to be an accurate reflection of their financial condition.
Chair WARREN. So you’re confident in the books now?
Ms. EBERLEY. I wouldn’t say that the losses are over, if that’s
your question.
Chair WARREN. That’s not my question. My question is whether
or not the books currently reflect appropriately the risks that these
banks face?
Ms. EBERLEY. I think, yes, generally they do. There are outliers,
but generally they do.
Chair WARREN. Thank you. Mr. Atkins.
Mr. ATKINS. Okay. Thank you very much. Let’s circle back
around to that. I think that was a good question with respect to

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54
the guidance back in the middle part of this decade. When it came
out, and I guess I am on more of a security side than a banking
side, but I assume that basically the purpose of the guidance was
to call attention to and to impact management to make sure that
they were looking for and taking into account various types of disaster scenarios and things like that. So, just to follow up on the
question, when that guidance was revised, in what way was it revised? And did it have any impact with respect to how banks were
treating their loans or undertaking new transactions?
Mr. GREENLEE. When we issued the guidance, we did put it out
for public comment, and, as you noted, we got a lot of comments
back from the industry and other participants. And, as we do with
everything we put out for public comment, we tried to take those
responses into account as we worked toward the final issuance of
the guidance. One chief concern that many people expressed at
that time was, again, concern that their business plans and the
lending that they were primarily engaged in, commercial real estate. There were also concerns about effects on local economies and
profitability of the institution as a whole. As regulators, we try to
strike a balance to make sure that the banks understand what the
downside scenarios are, that they have thought about that, in
terms of their capital planning, and conducted proper stress testing
so that the banks understand the capital impact. We also tried to
ensure that they understand the need to have effective processes
in place to manage the risks that they’re taking on in their institutions.
Mr. ATKINS. Ultimately, it was their decision and not the regulators’ decision, and we have had sort of a hundred or a thousandyear type of storm. But looking forward at current types of activity
in the marketplace, obviously, it’s very far down. And one of the
issues that gets raised over and over is how bank examiners might
be dampening the ability or willingness of bankers to undertake
new loans. And so I salute the the guidance, the training, and the
other things that you have been doing, because, as I know from
personal experience from the early 1990s when we went through a
similar thing, the regulators are not always as responsive. But it
sounds like you are trying.
So I was wondering do you have any assessment of how effective
that’s being, because, obviously, we don’t want to have the dreaded
‘‘F’’ word of forbearance. Do you perceive that examiner scrutiny is
depressing the willingness of bankers to be active in this marketplace?
Ms. EBERLEY. I don’t believe so. I think the greater constraints
are capital constraints that financial institutions are operating
under because of the volume of troubled assets that they have on
their books, and, additionally, liquidity concerns. I think those are
the two greatest constraints to institutions being able to lend.
Mr. ATKINS. With respect to demand then—well the liquidity
constraints and that sort of thing—but also the demand from business folks who are looking to take out loans. What we’re seeing, of
course is a depression of the demand. I guess we’ll hear more about
that later. But are you seeing that nationwide as a whole or is it
regionally focused?

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Mr. GREENLEE. From what we’re hearing and observing, the demand for credit is down considerably. Loans to businesses and consumers alike have been dropping in the banking system. We have
done a lot of work and we continue to try to better understand, the
supply and demand effects of credit. We hear stories just like you
do that the examiners perhaps are impeding credit being made
available to borrowers. We follow up on those things. And we have
issued supervisory statements, such as the November 2008 statement encouraging banks to make prudent loans. And in the CRE
guidance, it is especially important in terms of the effect it has on
small businesses, because a lot of small business loans are secured
by the real estate that the business owner owns or the business
owns. So we were trying to think about that as well.
Mr. ATKINS. Well, my time is up, so thank you.
Chair WARREN. Thank you. Mr. Silvers.
Mr. SILVERS. Thank you. I’ll try to continue the thread here. We
are looking at this ultimately from the perspective of our responsibilities and the relationship to TARP. What actions, if any,
should or might be taken with TARP funds or with the powers that
the bill passed by Congress in the crisis gives the Treasury to address commercial real estate? And, in order to begin to do that, we
need to begin by asking, ‘‘What’s the problem here?’’ You mentioned—I think each of you mentioned—liquidity as a potential
issue and you mentioned capital, the capital constraints in financial institutions. Those seem to be two possible diagnoses of, I
think, what your testimony and the testimony of our witnesses that
will follow you suggest is an absence of commercial real estate finance in this market and, to a significant degree, nationwide.
So can you comment on the relevant importance of those two
issues to start off?
Mr. GREENLEE. In terms of looking at the banks that we supervise and particularly the local community banks that specialize and
have concentrations in commercial real estate, I agree with my colleague that the capital constraints, the liquidity concerns that they
have, are a significant factor in their willingness and ability to continue to make commercial real estate loans or loans in general. We
also try to think about the broader marketplace, and the CMBS
market is an important provider of commercial real estate financing. And, as you know, we expanded the TALF program for CMBS
to provide some stability to that market and try to bring some investors back in. That has actually worked. We had one recent
CMBS issuance of TALF, and then following that, two more were
issued without TALF financing. So the broader CRE liquidity in
the marketplace is an important consideration. And it also gets to
investors’ willingness to take on this risk, and how they’re pricing
it, and how they see the future for real estate prices.
Mr. SILVERS. Ms. Eberley.
Ms. EBERLEY. I would say that capital is the most significant
concern facing financial institutions here in the Atlanta area, with
liquidity as the second.
Mr. SILVERS. Let’s focus on capital for a moment. I must say, I
am inherently suspicious of complaints about liquidity, the reason
being that my liquidity crisis is your belief that I am deluding my-

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self, as to the value of the asset I’m trying to sell. So I want to
focus on capital.
If that’s the major problem, that our financial institutions are
undercapitalized, that would suggest that perhaps—Ms. Eberley,
you raised the issue of trying to get assets off the books. Is that
a plausible solution, meaning if assets are moved off of bank books
at fair—at rational prices today, would that solve a liquidity crisis,
or, I mean, solve the capital crisis or would it exacerbate it?
Ms. EBERLEY. I would say it would exacerbate it. The institutions
need the capital to be able to sell loans at prices that the market
will pay. What they are doing now is they are recognizing market
value declines as they occur, typically on a quarterly basis, since
they file their financial statements with the regulators, and—and
it erodes capital over time.
Mr. SILVERS. And so now——
Ms. EBERLEY. And economic recovery would also help.
Mr. SILVERS. Yes. And I share the comments, the views of my
colleagues, that all these things are driven by larger economic
forces. But can you all comment on the relative capital strength as
you perceive in this marketplace as between community banks,
larger regional institutions, and national players? Is there a capital
problem across the board or is this limited to one or more segments
of the banking industry?
Ms. EBERLEY. I’ll speak to the community banks. They came into
this crisis with very strong capital levels compared to historic
norms, very strong capital, which has been fortunate.
Mr. SILVERS. So you would say that, in fact, community banks
are not where the capital problem resides.
Ms. EBERLEY. No. I said they came into the crisis with very
strong capital. It’s——
Mr. SILVERS. Finish the thought then.
Ms. EBERLEY. Yes. They definitely are facing capital pressures
now. It would have been far worse had they not come in with the
strong capital levels that they did at the beginning of the crisis.
Mr. SILVERS. And then can you comment—I know that you don’t
regulate the larger institutions directly, but—but you certainly pay
attention to them, given the fact that you insure them. Can you
comment on the other segments?
Ms. EBERLEY. I’d like to defer to Mr. Greenlee to talk about capital——
Mr. SILVERS. That’s fine.
Ms. EBERLEY [continuing]. With the larger institutions.
Chair WARREN. We’re going to have to be short. We’re over time.
Mr. GREENLEE. I would just quickly say that part of the supervisory stress test we conducted last Spring, the Supervisory Capital
Assessment Program (SCAP), was designed to ensure that the largest institutions had an adequate capital base to weather an adverse
economic scenario. And they have been able to raise significant
amounts of capital since that time.
Mr. SILVERS. So they are lending freely right now in this market?
Mr. GREENLEE. They are making loans, but the loan balances
overall are declining.
Chair WARREN. Mr. McWatters.

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Mr. MCWATTERS. Thank you. You know, I’ve heard a lot of problems. We have a lot of problems. But if you had to summarize in
a one-page memo to your immediate supervisor, who asked you,
how do I orchestrate a soft landing of the CRE market, what would
you say and why would you say it?
Mr. GREENLEE. I think that’s an interesting question. I would
say the one thing that we do know is that the broader economic
environment, the recession and increases in unemployment have
been a significant factor in commercial real estate prices falling,
and vacancies rising. In terms of trying to get prices to stabilize or
potentially recover, the economic environment is going to be a key
factor.
Ms. EBERLEY. I think what the regulators have already done is
the most important step that we can make, which is to encourage
institutions to engage in reasonable workouts of loans with borrowers that have the ability to pay. Perhaps not make the same
payment they were making before, but the ability to continue making payments to the institution at a reduced basis. Loans can be
reworked, restructured, partially charged down, and the inter-agency guidance addresses all of the options and specifically says that
regulators will not criticize bank management for engaging in that
sort of activity.
Mr. MCWATTERS. So it’s a bit of a kick the can down the road
with the expectation or, with the hope, that prices will recover, and
that prices will recover when more tenants are competing for the
properties, more purchasers are competing for the properties. And
that will only happen when their underlying businesses become
stronger.
Ms. EBERLEY. I wouldn’t call it a kick the can down the road. I
would call it a recognizing the economic reality of today. Loans are
going to have to be written down. There will have to be some partial write downs, and reworking, and restructuring, but it doesn’t
have to be a complete loss. There are ways to move forward.
Mr. MCWATTERS. Okay. Do you see a lot of simple refinancing at
existing prices with the expectation that prices will recover for the
property?
Ms. EBERLEY. Do you mean just rolling over a loan and——
Mr. MCWATTERS. Rolling it without writing down and impairing
regulatory capital. Taking losses in the light which effects share
value and so forth.
Ms. EBERLEY. We do occasionally. And there’s two ways that that
happens. One way is with a borrower that has the ability to continue servicing debt, and making payments, and amortizing a credit. Another way is—is where an institution would just refinance the
loan, set a payment date in the future, and say you’ll pay us then,
and that’s not acceptable.
Mr. MCWATTERS. Okay. Okay. How about an update on TALF
and PPIP? Where is that going and what’s the future?
Mr. GREENLEE. I can speak to TALF. My understanding is that
the last Federal Open Markets Committee (FOMC) indicated that
the TALF programs will be winding down on their scheduled dates.
But the FOMC also reserved the right to modify that schedule if
conditions warrant it is deemed appropriate.

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Ms. EBERLEY. In terms of PPIP, there haven’t been any Treasury
or taxpayer funds used to support a PFIF-type partnership. There
have been for the partnerships form basis supported by FDIC funds
or guarantees. And we continue to work on ways to refine the program.
Mr. MCWATTERS. I guess one more question. Every time I speak
with someone who wants to refinance or wants to borrow money,
they say they can’t refinance or they can’t borrow. But what I hear
from a lot of regulators and a lot of other people is, ‘‘Yeah, it’s happening.’’ A lot of banks are refinancing. Where is the disconnect?
And what’s happening in the marketplace? If I have an underwater
property that I want to refinance, how difficult is it? I mean is it
actually being done?
Mr. GREENLEE. In my discussions with bankers, I hear that it is
being done when they can do it in a prudent and effective way,
when a borrower has the willingness and ability to make payments
on a restructured basis.
Ms. EBERLEY. My discussions with examiners would indicate the
same, that it is being done.
Mr. MCWATTERS. Okay. That’s all.
Chair WARREN. Commissioner Neiman.
Mr. NEIMAN. I’d like to follow up on the CRE guidance and regulatory accounting, because I think there is a lack of full understanding by the public and the media, as to the purpose and the
objectives of the CRE guidance. You know, sometimes people refer
that it provides the ability for institutions to extend and pretend,
because it does not automatically consider an underwater loan to
be impaired, requiring that it be written down, if there is an expectation of repayment.
Could you elaborate on why regulators put first priority on loan
performance and the expectation of being repaid according to contract terms compared to with collateral? I think it would be helpful
just to go into that in a little more detail.
Ms. EBERLEY. Certainly. I think that first and foremost, when examiners are looking at loans and financial institutions, the very
first focus is on a borrower’s ability to repay the debt. We look to
the borrower. We expect financial institutions to look to the borrower, not to look to the sale of collateral. Ability to repay is the
fundamental tenet of lending that we expect in community institutions.
Mr. NEIMAN. And would you agree that loans that were paying,
the fact that the loan is being held to maturity, if they were required to mark these loans based on collateral, you would have a
great deal of volatility in those balance sheets without really referencing the true credit risk of that loan?
Ms. EBERLEY. So you’re saying, if a fair market value were
adopted on a wholesale basis for loan portfolios?
Mr. NEIMAN. That’s right.
Ms. EBERLEY. Yes. It would. It would inject a lot of volatility.
Mr. NEIMAN. Would you like to comment on issues around calls
to impose a full fair market accounting on loan portfolios held by
banks?
Mr. GREENLEE. I think that you have highlighted one of the key
considerations since a lot of the issues we were dealing with con-

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cern how to value the assets. We have gone through a period where
valuations have been challenged, particularly with some of the
mortgage-backed securities. I think the question you raise is really
a question of at what value do you have a buyer. While a buyer
would buy at distressed level, which would be a valuation of a different kind than just looking at the collateral values.
Mr. NEIMAN. I want to come back to these differences, and we’re
going to hear a lot, I assume, from the second panel, on the difference between credit risk and term risk. There are really two categories of commercial borrowers who are going to be facing default.
One group that faces a credit risk due to fundamentals like increasing vacancies and decreasing rent rolls or an inability to make
those payments. And another group who are paying on time and
have sufficient cash flow on projects that are performing, but the
value of the collateral has declined so much that in any refinancing
they would have to come up with sufficient equity to refinance that
project and have an inability to do that and thus face default or
foreclosure.
Can you elaborate on what are the key drivers? Where do you
see those falling out and impacting banks, which are the key drivers to foreclosures in commercial real estate?
Mr. GREENLEE. I’ll comment first. I think we have seen a lot of
construction projects, for example, come to completion or be running into difficulties in the last few years in particular. That is why
the whole focus on the borrower’s ability to repay, to sell the property, or to find a permanent investor, is such an important issue
and that is where we have tried to focus.
Some of our thinking behind this guidance that we issued last
October was to try to address the other point you were making
about the huge amount of refinancing risk that we see on the horizon and we know the property values have declined. Even if the
borrower does have the ability and willingness to pay, the terms
and conditions, and what the values are going to be, potentially are
very different than when the original loan was made. And so our
thought was that we need to find a way to restructure these loans.
We need to find a way to enable these people that have an ability
and willingness to repay, to stay in that property. We believe that
is better for the bank and for everyone involved.
Mr. NEIMAN. Do you want to comment?
Ms. EBERLEY. I have nothing to add. I agree completely.
Chair WARREN. Thank you. I’m actually just going to pick up on
the same theme in a short question. We are talking about the importance of capital, and that you need more capital, private capital
injected in these banks, not more government money in them. But
capital investments depend on confidence, and that confidence is
based on an accurate assessment of what this bank is worth, and
that depends on how these assets are valued. And, frankly, the regulators don’t give us a lot of confidence, based on their most recent
history. I’m concerned about the shifts in accounting standards. I
understand the point that Superintendent Neiman has raised and
that Mr. Atkins raised. But I want to go back to this October 2009
change. As I understand it—we all understand—that any loan that
has a loan-to-value ratio that’s low, that has a lot of equity in the
deal, is a loan that’s most likely to be repaid. And so as I under-

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stand this change in accounting, it says that, hey, if you’re in negative territory, if there’s not only no equity, but that you’re actually
below water on this loan, you don’t have to reflect that in your
books. You soften how to reflect that in your books. And what concerns me is how this helps improve the confidence in the banks
that—that the books accurately reflect where the banks stand financially so that investors say it’s good to invest in banks?
Every time I see this softening, I’m really troubled by it, and I
just want to understand it better. Ms. Eberley.
Ms. EBERLEY. I wouldn’t call it a softening, but the guidance I
think is much more structured to say you need to recognize the reality of the economic situation for the borrower and find a way to
move forward. That may require a partial charge down in the loan
balance. So the bank would—would reflect a loss and restructure
a loan at a lower balance that the borrower can then move forward
with. That can be a better deal, as Mr. Greenlee said, in the long
run for the financial institution——
Chair WARREN. That one I totally understand.
Ms. EBERLEY. Okay.
Chair WARREN. That’s not my concern. You’ve written it down
and it now accurately reflects what the properties were and the
likelihood that it’s going to be repaid. But where I am concerned
is the part that I’m reading that says, in effect, if you’ve gone from
a loan that had a positive equity on it to a loan that has a negative
equity on it, you don’t have to change your books so long as you
can continue to collect monthly payments. You don’t have to change
in your books the value of that loan. Now, if I’m not understanding
this correctly, that’s fine, but I want to understand it.
Ms. EBERLEY. No, that’s correct. And if the borrower has the financial wherewithal to repay the loan and you’re looking at the
borrower’s obligations on a global basis, and they have the capability and demonstrated willingness to repay the loan, there’s no
reason to write down that loan.
Chair WARREN. You are saying there’s no reason to write down
a loan. We should treat loans exactly the same whether they have
positive equity or negative equity? I don’t know any banker on
earth who has done that prior to this time, and, yet, this is what
the regulators are saying we should do? We should treat those as
if they were the same value?
Ms. EBERLEY. Bankers are making loans based on the borrower’s
ability to repay. The collateral is the secondary source of repayment, not the primary.
Chair WARREN. I’ll stop. Mr. Atkins.
Mr. ATKINS. Thank you. I just wanted to pick up on your discussion earlier about guidance with respect to market accounting and
FASB 157. Of course this comes up and when I was at the SEC
in the summer of 2008, we were hearing a lot of stories about how
accountants were forcing complete write-offs of some of these securities based on there being no trades or looking at the indexes and
things that were indicating that the values were very low. The
SEC, finally, in September of 2008, when FASB came out with
guidance with respect to 157 to clarify the orderly market aspect
of that, which I think was overdue and finally helpful, relieved
some chaos in the market. So I was wondering, do you view that

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guidance now as being sufficient? Does there need to be additional
guidance, with respect to mark-to-market accounting, or how do
you perceive that in your activities?
Mr. GREENLEE. I think that it was helpful to get clarification.
What I believe raises the most questions are the Level 3 assets and
how those ultimately get valued. As we’ve gone through the valuation process, the banks, our examiners, and the broader marketplace improved their ability to evaluate those assets. Confidence increased that the right factors were the focus. It is also important
not to be based solely on an index or something that tended to
maybe overshoot on the way down. Certainly, when you encounter
illiquid markets, valuation does get to be a challenge, and there is
also a lot of modeled risk that has to be managed. Fortunately, we
have seen improvement since we went into this financial crisis.
Mr. ATKINS. The pressure from the outside accountants has
abated because of that, so I assume that management now can
point to this guidance and that’s proven helpful?
Mr. GREENLEE. I believe it’s helpful. But I also believe that a lot
of those assets that were in question at the time were written down
quite a lot. So I am not sure there are going to be further significant write-downs on those particular assets. Valuation practices, at
least in some of the larger firms, have improved.
Mr. ATKINS. Okay. All right. Thanks.
Chair WARREN. Mr. Silvers.
Mr. SILVERS. Yes, thank you. This may not seem like it follows
the thread of the conversation, but I’m going to come back around
to it. Some of the testimony we have for today suggests strongly
that in this area, in the Atlanta metropolitan area, real estate development, residential real estate development, and all of the ancillary activities associated with it, is a very large portion of the economy in this area. Do you all have a sense of roughly what that appears to have been? Meaning how much economic activity have we
lost as a result of the deflating of the bubble in this area?
Ms. EBERLEY. I can’t give you a quantification of that. We can
go back to our research staff and give you an answer in writing.
Mr. SILVERS. Do you have a sense that it’s big?
Ms. EBERLEY. It is big. It is big. The Atlanta economy has been
driven by construction for many, many years. This goes back to the
early 1980s that it’s been a trend. It certainly has become more
pronounced in the last decade.
Mr. SILVERS. Mr. Greenlee, any thoughts about this?
Mr. GREENLEE. Well, I don’t live here, but my impression and my
understanding is exactly what Ms. Eberley described. Construction
and real estate development was a big driver of the economy here.
In terms of answering your question, I can speak to the Federal
Reserve Bank of Atlanta staff and see if we can get you additional
information.
Mr. SILVERS. It would be interesting to have some data on that.
Not just the direct development activity, but, as one of our other
witnesses put it, everything that flowed from it, architecture, furniture sales—secondary, tertiary. I would go for that. The reason
I want to put that on the record is because it seems to me that the
conversation we’ve just been having about mark-to-market, about
capital requirements and the like, appears to—tell me if you dis-

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agree—but it appears to suggest a strategy of attempting to kind
of hold on as much as possible to a set of values and arrangements
based on that economy that is no longer with us, in the hopes that
we will somehow return to it. I think this conversation about trying
to focus on rent, on cash flow, as opposed to property values, to collateral value, it has that feel to it. And that would appear to run
the risk that, if we’re not going to be able to return to that type
of economy, we are essentially locking in the financial system in a
way that will make it unable to shift to finance activity that could
actually lead to renewed growth. Can you comment on your views
of whether or not I’m identifying a reasonable matter of concern?
Ms. EBERLEY. Well, let me make a distinction that might help
address some of the concern that Chair Warren expressed, as well.
When a loan at an institution is considered collateral-dependent
and when the borrower’s ability to repay is clearly nonexistent or
not sufficient, the institution is required to look to the collateral
value and write the loan down to the collateral values. But that’s
where the borrower’s ability to repay is no longer apparent or evidenced and more certainly if payment is not happening.
Mr. SILVERS. Well, if your primary measure of value deteriorates
then——
Ms. EBERLEY. Right.
Mr. SILVERS [continuing]. You look to your secondary collateral.
Is it good enough?
Ms. EBERLEY. Right. And the accounting rules require that the
balances be written down.
Mr. SILVERS. Thank you.
Ms. WARREN. Thank you. Mr. McWatters.
Mr. MCWATTERS. Just a quick question. Would you support the
investment of additional TARP funds in Atlanta regional financial
institutions because of the CRE problem? Is it that bad or will it
recover in due course?
Ms. EBERLEY. Additional capital in Atlanta financial institutions
would be most helpful, and economic recovery would certainly
make a difference in Atlanta, as well.
Mr. GREENLEE. I would echo that. Improved capital would be
helpful to the banks.
Mr. MCWATTERS. So additional TARP funds?
Mr. GREENLEE. You would have to look at the details of the program and go through the process that we have been going through
with the banks that applied for TARP. Generally, improved capital
positions would be helpful.
Mr. MCWATTERS. Okay. Thank you.
Chair WARREN. Superintendent Neiman.
Mr. NEIMAN. Thank you. Three questions that I hope to get in.
Chair WARREN. Talk fast.
Mr. NEIMAN. They are critical to our February report. Do you see
CRE as posing a systemic risk to recovery and financial stability
or does it not rise to the level of residential and subprime and can
be contained?
Mr. GREENLEE. From our perspective, it is an important exposure
that the banks we supervise have. We have a lot of banks with significant concentrations and they are under stress because of the

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weakness in the CRE markets. And so it is something we do focus
a lot on and spend a lot of time working on.
Ms. EBERLEY. I would say that commercial real estate values
have declined more than they did in the last commercial real estate
crisis in the late ’eighties, but there are important protections, from
a regulatory standpoint, that have been put in place since that
time, including enhanced appraisal regulations, regulatory guidelines about loan-to-value limitations, and enhanced underwriting
practices and institutions. So I think there’s some mitigation there.
Mr. NEIMAN. Stress tests. Do you think that stress tests should
be rerun for an expanded class of institutions beyond the SCAP approach or with the new assumptions?
Mr. GREENLEE. What we are focused on right now at the Federal
Reserve is really trying to get improved stress testing practices in
the banks that we supervise improved. We think that is an improvement that the banks we need to better manage their business.
Mr. NEIMAN. Stress tests done by the bank?
Mr. GREENLEE. Yes. That is what we would like to see.
Mr. NEIMAN. Or the FDIC on an isolated basis. I know we used
a stress test in particular institutions where we think it may
present a problem.
Ms. EBERLEY. We absolutely do. And I think that stress testing
by financial institutions on their own balance sheets, on their own
economic circumstances, and their locality are very important.
Mr. NEIMAN. And then the third question. Are there any changes
in public policy that you would find helpful, particularly in dealing
with commercial real estate? It’s kind of a follow-up to Mark’s
question. Either in the TARP program itself or outside of TARP
that would help address this from either a Treasury or a regulatory
perspective? Are there tools that would be helpful to you in dealing
with CRE?
Mr. GREENLEE. I can only comment that we did what we thought
we could with the TALF, in terms of trying to help support the
CMBS market and provide financing there.
Mr. NEIMAN. From the FDIC’s perspective, are there any changes
needed to the public policy or tools?
Ms. EBERLEY. I think the best tool that we have is to work with
the institutions and get them to work with borrowers.
Mr. NEIMAN. Great. Do you think that CRE guidance is fully understood by institutions, or is there still work to be done in getting
institutions to really understand their responsibilities with respect
to modification?
Ms. EBERLEY. Yes. I think it’s an ongoing process.
Mr. GREENLEE. Yeah. We’ve done some initial outreach, but we
recognize we need to do more.
Chair WARREN. Thank you very much. This panel is excused. I
would like to call the second panel. I am pleased to welcome Brian
Olasov, who is the managing director of the Atlanta office of the
law firm McKenna, Long, and Aldridge. David Stockert is the CEO
of Post Properties, an Atlanta-based firm that develops and operates apartment buildings. Chris Burnett, the CEO of Cornerstone
Bank, a community bank in the Atlanta region. Hal Barry, chairman of Barry Real Estate Companies, an Atlanta-based developer
of commercial property. And Mark Elliott who is a partner at the

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Atlanta office of the law firm of Troutman Sanders and the head
of the Office and Industrial Properties practice. I appreciate you all
being with us today. I’m going to ask you, as I did with our first
witnesses, if you would hold your oral remarks to five minutes or
even less so that we’ll have more time for questions, but your written testimony will be part of the public record. Thank you very
much. If I could start with you, Mr. Olasov.

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STATEMENT OF BRIAN OLASOV, MANAGING DIRECTOR,
ATLANTA, McKENNA, LONG, AND ALDRIDGE

Mr. OLASOV. Madam Chair and distinguished members of the
Panel, I’m very enthusiastic to be testifying before you today. In
fact, I’m chomping at the bit after that first panel to discuss some
of these issues.
Chair WARREN. We thought you might be.
Mr. OLASOV. As the Panel described in selecting the site for today’s discussion, it’s entirely appropriate that the hearing be held
in Georgia, whose banking system has suffered disproportionately.
Over the past couple of weeks I’ve had the opportunity to discuss
my views with staff members of the Oversight Panel, and I’d like
to reiterate some of these opinions today.
By way of background, I have worked in commercial banking, investment banking, a bank regulatory research environment, academia, and I’m currently at a national law firm where I’ve had the
opportunity to assist in large, complex real estate workouts, both
in commercial and residential transactions shared between portfolio lenders, banks that we’re going to discuss in greater detail
today, and in the area of structured finance, MBS and CMBS. I
have worked extensively as an expert witness in litigation involving residential and CMBS.
During the previous downturn, I collaborated on building a historical market to market model for the thrift industry and testing,
and frequently refuting various theories of conventional wisdom
concerning what happened to the thrift industry, what were the
factors that actually collapsed the thrift industry.
My written statement can be brief, as I have also submitted two
recent editorials, along with a draft white paper that reflects my
views on a policy prescription to deal with the continuing unresolved problem of toxic assets in banking. That reflects very much
the thoughts of COP’s August report. And I applaud the August report and some of their conclusions reached.
Let me summarize my opinions and observations. In my view,
there is a logical and inevitable sequence that follows from an inability or unwillingness to move problem assets from banks. The
inability or unwillingness of banks to remove these assets stems
from the overwhelming and justified desire to preserve regulatory
capital. As long as banks sit on material levels of problem loans,
given the volatile nature of the value and cash flow attributes of
these loans, available cash will migrate to excess reserves of the
Fed or low-risk securities include Treasuries and agency mortgage
banks.
When regulatory enforcement is perceived by bank management
as either unfairly severe or capricious, and I think that’s applicable
to the earlier discussion on policy guidance that came out in Octo-

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ber, this accelerates the movement towards more restrictive lending policies, and this is dramatic and demonstrable. This results in
a constriction of available credit.
Since the architectural intent of financial stability in all its
guises, obviously including TARP, is to bridge the economy until
private sector demand reengages, the absence of a healthy, functioning credit allocation system, primarily a banking system, prolongs the need for this bridge to exist. This comes at a terrible
price to the real economy and to the American taxpayer that must
support this skein in subsidies.
Conventional wisdom holds that distress in residential markets
has bottomed out. I happen to disagree with that. And that the
commercial real estate mortgage market is the next shoe to drop.
My own informal research indicates a lag of approximately six
quarters between residential and commercial mortgage markets. If
this relationship persists, and in the presence of delinquency and
default numbers that are still rising in residential mortgage markets, commercial markets are at least 18 months, and I would
argue considerably longer, from touching bottom.
The deteriorating performance of the CMBS market gives us a
predictor of increasing problems in bank portfolios, as can be seen
in the graph. And for those of you who have a copy of this, CMBS,
I think, is instructive because it doesn’t suffer the same accounting
confusions that the earlier panel touched on.
Until we design a mechanism that promotes the movement of
problem assets off banks’ balance sheets, banks will be less inclined
to meet reasonable, prudent borrower requests. This problem will
become increasingly acute as 1.4 trillion dollars of commercial real
estate loans balloon over the next three years. At a national level
where banks hold 1.8 trillion of CRE loans, or 13.5 percent of all
bank assets, a deterioration of CRE portfolios will jeopardize some
already weakened banks. And I would add that those are likely to
be in those same areas that are currently suffering residential
problems, making it much more difficult for those regional banks
in that regional system to recover.
In Georgia, where 23——
Chair WARREN. Mr. Olasov, I’m sorry, sir. We’re at five minutes.
I’m going to ask you to finish up, please.
Mr. OLASOV. All right. Thank you. I’ll end on a positive note,
which is to say that in supporting CMBS and indirectly commercial
mortgage lending, TALF has contributed to a dramatic reduction of
spreads on senior bonds. TALF funding has been extraordinarily
limited, but it’s still been extremely helpful including promoting
new CMBS issuance in the fourth quarter.
[The prepared statement of Mr. Olasov follows:]

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70
Chair WARREN. Thank you very much. Mr. Stockert.

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STATEMENT OF DAVID STOCKERT, CHIEF EXECUTIVE
OFFICER, POST PROPERTIES

Mr. STOCKERT. Thank you, Madam Chair, distinguished members of the Congressional Oversight Panel. I am David Stockert,
the president and CEO of Post Properties. We are a REIT that
owns and operates nearly 20 thousand apartments in 55 communities. Our total market capitalization is roughly two billion dollars. I am testifying for the National Multi Housing Council and
the National Apartment Association and have been asked to discuss the state of the apartment market.
2009 was one of the most challenging years in memory for our
industry. The vacancy rate for investment grade apartments hit
eight percent in fourth quarter, an almost 30-year high. 2009’s 2.3
percent drop in rents nationally was the largest in 30 years. With
more than four-and-a-half million vacant rental units, absorption
rates for newly completed apartments had dropped to the lowest
levels since 1989. Property values have declined by more than 30
percent, and transaction volume has plummeted from $100 billion
to around $14 billion in just two years.
Because of the capital shortage, new apartment development has
come to a virtual standstill. New apartment starts set a post World
War II record low of 84 thousand units down 67 percent from a
year ago. This comes as the foreclosure crisis and the echo boomers
entering the housing market have modestly increased demand for
rental housing. Analysts project the growing demand will create a
shortage of apartments beginning as early as late 2011.
In addition to these challenging conditions, our industry faces an
estimated 50 to 60 billion dollars in loans maturing in 2010 and
2011 that will need to be refinanced. Now, many believe that 2010
will likely mark the bottom fundamentally of the market, but the
headwinds are still very strong. GDP may recover in 2010, but significant job growth is not expected until 2011 or later, and employment is the primary driver of demand in our business. The loss of
over eight million jobs is a severe blow to the industry. In addition,
we think the recovery will likely be one based on a flight to quality.
Public companies like ours will have greater access and do have
greater access to low-cost debt and other forms of capital. Other
nonpublic companies in our industry are not nearly as fortunate.
Older properties with weaker sponsorship and properties in secondary markets will continue to find it difficult to access capital.
Looking at the capital markets, the multifamily sector has benefited from the presence of the GSEs, Fannie Mae and Freddie Mac,
and the FHA multifamily mortgage insurance program, which has
served as a partial replacement for the construction financing.
These two capital sources accounted for 90 to 95 percent of all the
multifamily debt issued in 2009.
While the multifamily sector has enjoyed more liquidity through
the GSEs than the rest of commercial real estate, industry has not
been all good news. All debt sources have tightened their requirements, meaning firms must provide additional equity, refinance
debt, purchase property, or start a new development. With most eq-

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uity sources on the sidelines, this has exacerbated the capital
shortage in the apartment sector.
The GSEs are very necessary, but they’re not wholly sufficient.
Reestablishing a viable CMBS market is also critical. This will require reforming the regulatory oversight in Wall Street and improving transparency and rating agency performance. In addition,
we are urging the Treasury Department to extend the TALF program through 2010.
I also want to address the widespread media coverage of multifamily CMBS defaults. These reports have left the impression that
all multifamily mortgages are experiencing high default rates. This
is untrue. CMBS represents just 12 percent of the more than 900
billion of outstanding multifamily loans. The vast majority of multifamily mortgages are held by commercial banks, insurance companies, and the GSEs. When those loans are examined, multifamily
default rates are quite low. Delinquencies for loans issued by insurance companies and GSEs remain well below one percent, and the
GSEs are underwriting new multifamily loans with good coverage
ratios and relatively moderate loan to value levels.
Given the importance of the GSEs to the apartment sector, we
are closely watching reform efforts, which are just getting underway. In the short term, we are reassured by the Treasury’s December 24th announcement confirming its unlimited support for the
GSEs through 2012. In the long term, however, it is critical that
policy makers understand the unique needs of the multifamily
housing sector and not restrict the supply of multifamily capital as
they reform the single family financing process.
Among other things, the reformed GSEs must continue their
vital role as a source of permanent debt to refinance construction
loans. They should also continue to provide capital for affordable
housing projects with greater risk profiles.
Chair Warren. Mr. Stockert——
Mr. STOCKERT. I’m going to stop there, and thank you very much
for listening.
[The prepared statement of Mr. Stockert follows:]

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98
Chair WARREN. Thank you very much. I appreciate it.
Mr. Burnett.

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STATEMENT OF CHRIS BURNETT, CHIEF EXECUTIVE OFFICER,
CORNERSTONE BANK

Mr. BURNETT. Thank you. Good morning. I am Chris Burnett. I
am the chief executive officer of Cornerstone Bank headquartered
here in Atlanta. Cornerstone is one of Georgia’s 25 largest community banks with assets of 550 million dollars with one-third of our
loans in housing, one-third of our loans in small business financing,
and a third in commercial real estate loans. We do have a balanced
portfolio and a balanced perspective on the problems facing our
economy today.
Commercial real estate is certainly a challenging area, but you
cannot talk about this category without stressing the impact that
has been had from the housing industry. As we all know, new
home construction and residential lot development was the first
issue to hit the economic downturn. When the mortgage market
seized up, builders could not find buyers for their homes, and the
need for developed lots virtually went to zero, causing many developers to fail and leaving hundreds of projects in suspension.
The effectors, the effect on our lenders was devastating. In Georgia, we’ve already seen 30 community banks fail, all of which had
heavy concentrations in residential development and construction
loans.
We’ve also seen the problems in the job market. We’re acutely familiar with the devastation in our residential housing and its impact on the economy, as thousands of jobs have been lost in Georgia in that industry and many more workers leaving our state.
Regarding commercial real estate, for most community banks
like ours the typical client is a business owner with financial substance, substance that has been—or has had the wherewithal to
move from rental space into owner-occupied buildings. Unless those
owner-occupants were involved in the real estate industry or retailing, most borrowers continue to make their payments on time, and
the performance of most owner-occupied commercial loan portfolios
remain satisfactory through 2009. But the difficult economy has
taken its toll, draining earnings and liquidity from once strong borrowers. The aftershocks of the recession continue to abate a recovery and consumer confidence, thus restricting spending. As a result, we are now seeing a rise in borrower and tenant distress. Tenants are asking for rental concessions, which are often granted, but
this reduces the cash flow available to meet debt service. This issue
is systemic at all levels. Even the larger banks, the insurance companies, and the pension funds that lend on the much larger commercial projects are also reporting similar stresses. As we have
talked about, vacancy rates for these projects in the metro Atlanta
area are now over 20 percent, and that sort of rate is not sustainable with the level of debt that most owners incur to bring those
projects to market.
On the retail front in particular, where the greatest deterioration
is occurring, as long as unemployment remains high and the economic news is negative, consumer spending will be tight. As a result, more retailers, especially nonfranchised, small businesses are

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closing. The same is true for service businesses that occupy office
space. As these companies contract or close all together, vacancy
rates climb and cash flows available for debt service decline. The
banks are then often confronted with a dilemma. They must either
foreclose on the properties or restructure the mortgages, allowing
them to convert to interest-only payment terms and often times
lowering their interest rates. These loans then become known as
troubled debt restructures, meaning that they must be classified as
substandard assets. New appraisals are mandated by regulatory
rules, and if the new values do not support those loan balances,
specific reserves must be established further eroding bank capital.
There is no question that it’s more unlikely today for borrowers
to obtain credit. Borrower’s financial conditions have deteriorated
making loan decisions more difficult to make. Strong pressure by
regulators to reserve for projected loan losses and to reduce real estate lending concentrations further impairs a borrower’s ability to
obtain credit. In many cases throughout Georgia, regulatory orders
directed at troubled institutions mandate no growth and asset
shrinkage policies, therefore making it impossible for those banks
to extend credit. And all of this goes on while private capital sits
on the sidelines still apprehensive to invest in Georgia’s banks.
Let me be clear. We want to make good loans to help businesses
in our communities grow. That is what we do and that is what our
industry is all about. That is what Main Street banking is all
about. But it can be frustrating to borrowers and bankers when we
are told lend more and be as flexible as possible with workouts, but
also apply the hard lessons learned related to sound underwriting.
With these conflicting messages, lending more money right now is
a very delicate balance.
And finally asking—I’m going to speak briefly on the TARP
issue. Twenty-six banks in Georgia have received TARP investments. My bank is not one of those. The TARP application process
was perhaps the most frustrating regulatory experience in my 30
years in this industry. Our bank applied in 2008 as soon as the
program was announced. We were finally told to withdraw our application in October of 2009, almost a year after the program
began. Early in the process we had new capital lined up alongside
with TARP, because the receipt of TARP was viewed as a confirmation of viability, but after ten months of waiting for an answer,
those capital sources had dried up.
In my opinion, the measure of TARP’s effectiveness can be assessed in two ways. If the intent is to help banks clean up their
balance sheets and rid them of troubled assets, then it has been
effective to a degree in Georgia. Those banks that did receive TARP
investments have been able to rid their books of some distressed
assets, although at extremely low values. However, if the intent
was to stimulate more lending, the jury is still out on TARP’s effectiveness.
Banks have burned through enormous amounts of capital for
both actual and projected losses with only about 40 percent of
Georgia’s banks currently profitable. Banks cannot increase retained earnings. They cannot shore up their capital positions until
they return to profitability.

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Chair WARREN. Mr. Burnett, I’m going to have to stop you on
time there. But thank you very much. We wanted to hear this
about TARP. Thank you.
[The prepared statement of Mr. Burnett follows:]

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111
Chair WARREN. Mr. Elliott.

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STATEMENT OF MARK ELLIOTT, PARTNER AND HEAD OF THE
OFFICE AND INDUSTRIAL REAL ESTATE GROUP, TROUTMAN
SANDERS

Mr. ELLIOTT. Thank you, Professor Warren and members of the
Panel. My name is Mark Elliott, and I’m the head of the office and
industrial real estate group at Troutman Sanders. As Mayor Reed
said, Atlanta is a real estate town. I have seen more distress in the
market here in the last year than in my 30 years of practice. And
before I get into specifics, let me just share something with you
anecdotally on the numbers. Just to kind of illustrate the point:
deal volume for transactions, that’s purchases and sales in 2007
compared to 2009 in our business has gone down to roughly onesixteenth. It’s roughly in 2009 six percent of what it was in 2007.
And we, as a country and the press, decried and panic when retail
sales nationwide drop by seven percent. We dropped by 95 percent,
and that distress is remarkable, and it’s having catastrophic effects
on the service providers in the industry.
And I think there are two reasons for this. It relates from problems on the supply side and problems on the demand side. And,
Mr. Atkins, you had asked for some comments on the demand side.
And I’m very happy to address that now.
Basically, for a real estate developer or an owner to borrow
money, they basically need to make sure that they are going to
have a return on that money and a profit that covers the cost of
the capital plus the cost of borrowing, plus some profit to the
owner. And I think for three specific reasons, you’re not going to
see borrowing of any kind of rigor for quite some time. The first
of which is, and people have addressed it here today, it’s the tremendous loss of jobs in our economy, and I know you used an eight
million figure. I think it’s 6.1 million jobs lost in calendar year
2009. And, Mr. McWatters, as you said, we’ll build this back one
job at a time, but the crash in the real estate industry has occurred
one job loss at a time. And every loss of those jobs represents an
empty office somewhere and—or at least there’s some very strong
correlation. So eight million jobs lost is a lot of empty offices.
The second point is a tremendous loss of confidence in the business sector coupled by a loss in market cap on the tenants of this
space. Just like builders build buildings on the come, so do tenants
lease on the come, and when you’re a business unit owner, and
you’re leasing space in the future, you’re making business expectations and you’re making business judgments on the basis of your
business growing or at least that’s been the hope. There is complete
loss of confidence on the business growth aspect. And I would say
the tenant base is much more worried about what they can do to
shrink or get out of their lease five years from now than they are
on what they can do to grow that lease.
And the third one is the whole mandate on the corporate America to cut costs and to cut costs aggressively. Typically, you’ll see
that the second greatest cost that business unit owners faced after
employment is real estate costs, and people are cutting their space
and they’re cutting the cost of their space, and they are very, very
aggressively renegotiating lease rates. And, Mr. Neiman, you made

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the point about looking out at the Hyatt Regency 25 years ago and
being able to see a nice view of Atlanta. Even though there are
buildings in the way now, because of the empty offices they have
in the upper levels of those buildings you can just look right
through the windows and enjoy those views again. And that is having a very, very dramatic affect on the value of businesses.
I guess I’ll summarize in this last minute. I think the commercial
office market, if you look at the life of an office building, it’s almost
like an aircraft carrier. You can’t brake it on a second’s notice, and
you can’t accelerate it on a second’s notice. And what you’re going
to continue to see as leases roll over the next three, six, nine, 12,
15 months that you’re not seeing now is empty offices where tenants are still paying coupon rate and contract rate because that’s
their obligation, are going to continue to shrink because that represents their actual need for the space. They are going to continue
to aggressively renegotiate their lease rates to reflect current value,
not what they agreed to pay in 2001, when they entered into that
lease. And so, I think you’re going to continue to see on the demand
side an incredible reticence to engage in any kind of borrowing.
And I’ll stop there.
[The prepared statement of Mr. Elliott follows:]

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130
Chair WARREN. Thank you very much, Mr. Elliott. Mr. Barry.

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STATEMENT OF HAL BARRY, CHAIRMAN, BARRY REAL ESTATE
COMPANIES

Mr. BARRY. Thank you very much for having me, and I really appreciate the opportunity to be here. A lot to think about. You all
said a lot of things that made me do more thinking. Let me begin
with a quick introduction of who I am. I am president of Barry
Real Estate Companies. I am an Iowa native, but have been in Atlanta and involved in commercial real estate since 1966 and as a
developer since 1975. Mr. Neiman, you may remember John
Portman. I was partnered up with John Portman on a development
in the suburbs as Portman-Barry, and in the 1980s, we were the
guys that built the big, spec buildings and hoped they would lease
as office buildings. And we proved that didn’t work. And in 1995
we formed Barry Real Estate Companies. And, hey, as opposed to
big, and spec, and empty, our approach was take the supply and
demand that you referred to earlier out of the equation, but build
to lease properties, so a little different equation. You have to learn
how to meet the demand of that prospect and how to show him how
you can deliver a building whether it be a year later, or two years
later, or even longer, but how to develop, design, and finance a
property. Give him the lowest possible rent structure, but also create the lifestyle for that tenant.
Well, we’ve had a hell of a run at it. It’s been good, about four
million feet. We’re a small entrepreneurial Atlanta-based company
that has been able to develop on a user-basis throughout the country. And so it was rolling really good until, as you know, this started happening about two years ago. And let me talk about some of
our problems with our existing portfolio and then—and then the
pipeline, as I see it today.
On the existing issues, in downtown Atlanta we are developing
a project not too far from here and when you go out, as you go
down the expressway, you’ll see this. You’ll see part of it. You’ll see
a building that’s leased to Ernst & Young and other tenants, a
preleased building, and across the street you’ll see the Southern
Company building, two buildings. We went into an area that the
last new building that had been built in downtown Atlanta was
probably 15, 20 years ago, and we saw this movement to midtown,
and we saw the exodus to the suburbs, and I was part of that, but
we saw a real opportunity downtown. And so we felt we could
make a deal that moved the headquarters of Southern Company
down there. It worked. So we bought the next site and built the
Ernst & Young building. You will see our W Hotel is there as well.
But in the process of that, we said, look, this is the urban center
of Atlanta. This is where it should happen. This is where—we talk
about commuting, and we all know Atlanta created the colossal
traffic jam 24 hours a day. You know, it is awful. And so we said
there’s a better way. There’s a better way than public transportation. That better way is walking to work, that is live, work, play
communities. And so what we did over the last four years, five
years, in red, and I can submit you copies of this, is a total of nine
blocks that we assembled. Some of which we have under contract,
part of which we owned with Mr. Stockert and Post Properties to

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build residential on it, but a total of nine blocks. A focus on urban
living—a live, work, play, walking community—Atlanta is beginning to figure it out. There’s a better way than sitting in the automobile. And so we we’re headed toward the most exciting thing I’ve
ever done.
But guess what? With this recession, it hit us really hard. So
about a week ago or two weeks ago, it hit the press. We have a
lender, a bank who has a loan on the best site we’ve got, the one
where that big building’s planned. We designed that building out
for various users. We’re not going to start a spec building at that
size. In fact, back to our user-driven philosophy, we don’t start spec
buildings. You don’t have a tenant; you don’t build. Take the supply and demand risk out of it.
Chair WARREN. Mr. Barry, we’re out of time here.
Mr. BARRY. Are we out of time?
Chair WARREN. Do you want to give us a sentence on how the
story comes out?
Mr. BARRY. Well, I want to move onto one other thing. That is,
very quickly, we tried to finance. We were lucky. Our user-driven
business signed leases with the U.S. government to build four GSA
facilities in St. Louis, Minneapolis, Cincinnati, and Portland, Oregon. Finding a bank—a U.S. bank to finance government-leased
buildings in today’s market—Mr. Silvers, you’re laughing. You
know where I’m coming from. It’s been a real chore.
Chair WARREN. Thank you, Mr. Barry.
So I’d like to start with my questions with the reason we do field
hearings. I read a lot of different speculation about where we are
in this commercial real estate downturn. And here we are in Atlanta with five people who have clearly got dirt under their fingernails and are trying to live through it. And I would just like your
assessments. And where we can, give a little bit to back it up.
Where are we in this? You know, is it that we’ve gone down and
we’ve hit bottom, we’re near bottom? Mr. Elliott, you gave us some
startling numbers about how far we’ve gone down, but you’re talking about continuing to shrink. Can you give us some sense of what
it feels like and what kind of data you can point to on where you
think we are in this? Mr. Stockert, you look like you’d like to jump
in first.
Mr. STOCKERT. Well, I’ll just—I can speak for the multifamily——
Chair WARREN. Please.
Mr. STOCKERT [continuing]. Housing market. I think that we are
nearing the bottom of fundamentals in our business. And I think
many of us in the business feel like we are starting to at least see
some glimmers in the way of some modest upturns in GDP that we
might reasonably assume are going to lead to some job growth during the course of the next couple of years. The better fundamental
factor for us is that the supply of housing of all kinds is coming
to a near standstill. So, if you look at Atlanta at the peak, we were
permitting 70 thousand housing units, and that wasn’t just because
people were nutty in development. There were 150 thousand people
moving into the metro every year. We were trying to meet that demand for housing. And of course we overdid it.

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But today we are on pace to do six thousand permits, seven thousand permits in this market. So I get excited, as an owner of multifamily and one who’s got a reasonable balance sheet, because I
think that we will come to a point where we will be undersupplied
in housing.
Chair WARREN. So you think, at least in residential multifamily,
you look like you’re near the bottom just because of a supply and
demand——
Mr. STOCKERT. Well, yes, on the fundamentals. We’re going to
have a terrible year in cash flow because the rents that we banked
in last year are going to run through to the next year too, so cash
flows are going to be down.
Chair WARREN. I hear you.
Mr. STOCKERT. But, we can see some light.
Chair WARREN. Mr. Burnett.
Mr. BURNETT. Yes. I’ll address the residential single family,
which I do believe we are at the bottom of that marketplace. And
particularly in the last several months we have seen an improvement in home sales, particularly in our foreclosed inventory, and
we are down significantly on the number of homes in foreclosure.
I think that’s being driven by two primary factors. First of all, we
know that interest rates are poised to increase, and, so, if people
want to buy a home they need to strike now while rates are still
low. And second, I think the first-time home buyer credit has been
effective here in Atlanta, which is an affordable housing market.
But, surprisingly, we are now seeing a pickup in lot sales for the
first time because, as Dave said, we had about six thousand building permits issued this past year. And that’s about two years consecutively that we’ve built virtually no products. So finally lots are
beginning to sell.
Chair WARREN. And can I just ask, you don’t think you have a
shadow inventory problem that as things pick up you’ve got a lot
of banks and others that didn’t foreclose, and therefore, more property is going to gush back onto the market and push it back down.
Mr. BURNETT. I think from the banking perspective we are in a
better position there because we have new product versus competing with a mortgage lender who has foreclosed on an existing
home. When you’re selling a brand new product that’s never been
lived in, it simply is more appealing.
Chair WARREN. Okay. But that doesn’t mean that the whole market is at bottom. It only means the new market is at bottom and
starting to turn out. The sale of previously owned homes——
Mr. BURNETT. Correct. And I think that the new market will lead
us out of this. Existing home sales will continue to be much more
sluggish.
Chair WARREN. Thank you. Mr. Elliott, can I ask you?
Mr. ELLIOTT. Thank you. You used a great term, which is shadow inventory. And I’m afraid that on the office side, unlike hotels
which have their tenant base walk in every night and apartments,
which have their tenant base walk out or not every 12 months, office leases are signed for ten or 15-year periods. And when someone
quotes a 15 or 20 percent vacancy rate, they are not factoring in
unused office space, shadow inventory that, when leases continue
to roll in their natural course as they will every year over time,

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that you’re going to continue to see large users giving back ten, 20,
25 percent of their space. So no, I don’t think we’ve hit bottom, because I don’t think we’ve accurately reflected what, on the user’s
side of the commercial office sector, the real use is.
Chair WARREN. Thank you. That’s very helpful. Mr. Barry.
Mr. BARRY. Well, just maybe on a positive note. In 1995, we
began to see the markets come back, and we started doing userdriven type office buildings. We’re seeing some of the same thing
today. As far as multi-tenant buildings, it’s a disaster. But if there
are users that have specific needs that may want to do build-to-suit
buildings, in our focus that’s around the Southeast, we’re seeing
some of that now.
Chair WARREN. If the panel will indulge me, I’d like Mr. Olasov
to give us his thoughts on this too.
Mr. OLASOV. Yes, just very briefly. I would say that what we are
seeing in commercial real estate, we are into the second wave of
weakness. The first wave I would characterize as structural, which
is that there is just too much leverage on commercial property markets. The debt got too complicated. That raises all sorts of governance issues. If you take a look at the Moody’s research showing
peak to trough, where peak was October 2007 and where we are
right now, all commercial property, all property types, all regions
are down 43 percent. A big chunk of that’s attributable to leverage
problems and what I would call debt, debt structure, and capital
stack problems. Now we are starting to see the second wave, and
I would echo what Mark has to say. Different collateral types have
different life cycles largely dependent on the duration of the leases.
So if you take a look at the property types that are most demonstrably the weakest, you start with the shortest possible duration
lease. That’s a hotel. That’s a one-night lease. And we’re seeing delinquencies in CMBS pushing 20 percent in hotels.
Multifamily is the next shorter duration. Office, at the other end
of the spectrum, tends to be longer term, more stable tenants, but,
as you start seeing lease rollover, this is going to move from the
capital problems to fundamental problems in operating income.
And we haven’t even begun to see that play out yet.
Chair WARREN. Thank you very much. Mr. Atkins.
Mr. ATKINS. Thank you. I’m just going to follow up with that too.
So actually that was perfect. I wanted to explore a little bit more
than our former panel of bank regulators who were talking about
some of the steps that they’ve taken from a regulatory aspect to try
to make it possible for banks to lend more. So I was wondering
your perception, both as the banker in one case and with respect
to either servicers or users in that business, how do you perceive
the general attitude of banks to lend and whether that is because
of, you know, perhaps over-weeding examiners who are maybe too
tough, or not tough enough on the other hand, or because there are
other internal aspects that are keeping lending down, or is it more
of a fundamental economic question that we have right now?
So if you start Mr. Burnett, and we can go down the line.
Mr. BURNETT. It is difficult for me to speak across the board. But
I know in our specific situation I have been very pleased with the
relationship we have been able to maintain with our regulators
through this, particularly here at the local level. They have had a

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good balance between the things that need to be said and the way
that they say it. I will say that they are under pressure as well,
obviously, to perform in their responsibilities. There are some accounting issues that must be enforced that are real Achilles to our
industry right now. There are some regulations coming from Washington on liquidity that are very difficult that put banks in impossible positions of perilous liquidity.
Those are not things that are decided at the local level, but they
must be enforced by the local regulatory commissioners. I don’t
want to take a lot of time, but I can go into a lot of different issues
on accounting and the way you have to account for your loan loss
reserves and interest rate caps on deposits and things like that
that are all working against capital and liquidity, the two things
most important to our industry right now.
Mr. ATKINS. Mr. Olasov, and then we’ll just go down quickly.
Mr. OLASOV. I don’t think that there is any issue that there is
significantly less capital available for lending to meet prudent credit requests—certainly in commercial real estate. There’s a complete
drought to meet the needs of either new legitimate business properties, or, I think more acutely, in terms of refinancing this enormous wave of commercial mortgages that are coming due over the
next three years. And it’s easily observable. All you need to do is
take a look at call reports of the banking system to take a look at
a decline in loans outstanding. But I think more importantly and
more perniciously, if you go to the H–8 Federal Reserve reports,
you see lines of credit, either corporate lines of credit that have
been cut. Again, peak to trough 1.7 trillion dollars. This is the lifeblood of businesses, who then go into the marketplace to use space
to create new jobs where at the bottom you have part of the food
chain of small businesses. A lot of small businesses live off credit
card borrowings.
Credit cards, lines of credit available are down a trillion dollars,
again peak to trough. That is absolutely observable, and very clear,
and obviously it has extraordinary knock-on impacts on the economy, and specifically with respect to the ability of all the powers
that be in Washington to start removing props that have been holding up the economy for the last year. That’s the reason that I
thought the third quarter GDP growth of three-plus percent was a
very false positive, and that concerns me.
Mr. ATKINS. Mr. Stockert.
Mr. STOCKERT. Yes. I don’t want to repeat everything everyone
said, but it’s true. I do think in fairness it’s true that you can’t get
the loan, or is it that you can’t get the loan you want to get. You
certainly can’t get the loan that you got before.
Mr. ATKINS. Right.
Mr. STOCKERT. And most of what we all are focused on at the
moment is refinancing existing debt. Although there is not a lot of
construction financing available, there is also not a lot of demand
for that, because most of us, other than some in select cases where
you’ve got builders, you just don’t see the demand for it. But we
live in the public market, and the public market has really been
out front. In terms of price discovery, our stocks, the REIT stocks,
hit their lows in March. That was a come to Jesus moment for all
of us. That was price discovery on our assets. And since that time

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asset pricing in both the public markets and in the private markets
has come back up a little bit. So back to the early comments about
mark-to-market accounting. We do have to get the prices of discovery. We have to get to the right kind of reasonable price discovery, because, had we done it at all in March of 2009, we would
have collapsed everybody and everything. And that would have
been inappropriate to do. You know, we’re getting closer today
where we’re finding realistic asset values in my opinion.
Mr. BARRY. Well, just quickly, one more time. I mean, on the four
GSA deals, there’s not financing in the marketplace. And we will
get there. We are still working on them, and we will get there, but
the banks are basically out of business. And it has nothing to do
with balance sheet, our balance sheet.
Mr. ATKINS. Thanks. My time is up.
Chair WARREN. Thank you very much. Mr. Silvers.
Mr. SILVERS. I want to follow up on my colleague’s line of questioning here. Mr. Barry and Mr. Stockert, if I understood your initial testimony, Mr. Barry, you showed us a layout of properties in
downtown Atlanta. Am I right in understanding that currently you
cannot proceed on that project?
Mr. BARRY. Well, the key block in the middle of it had a loan
with a bank that has since been taken over by FDIC. We tried to
extend the loan. We tried to do a workout, something short of continuing full payment. That didn’t happen. They amortized on us.
We have since agreed to come out-of-pocket and to carry it. I don’t
know exactly why we’re doing it, because I don’t think anything is
going to happen in a year. We agreed to extend it for a year, to
pay the interest, et cetera. And we’re going to try to salvage that
block because of what it means to Atlanta. What it means to Allen
Plaza, and what it means to us. Do we have a tenant for it today?
No. And it’s the heart of what we’re trying to do and what we’re
trying to prove in downtown Atlanta.
Mr. SILVERS. Let me just follow-up on this and I would invite any
of you to respond with respect to this project or with respect to
other projects, and Mr. Olasov, and Mr. Elliott, with respect to
your clients’ projects. It strikes me that, whether it’s the GSA
buildings or high-density downtown residential real estate, it’s consistent with, I think, the overall direction of the economy that certainly President Obama has laid out—we want to be more energy
efficient, have less traffic, and the like. With respect to the TARP,
which is after all what brings us here, do you have thoughts as to
what steps could be taken to make it more likely that projects that
are economically beneficial are going to create jobs, steps that could
be taken under the TARP to make that more likely? And, in doing
so, I would hope you could respond to that question, I hope you
could respond with a specific reference again to what the problems
are. Mr. Barry, you said the problem is not the creditworthiness of
the developer, but some other problem. There has been some talk
about both the broader economy and the question of whether, say,
the CMBS markets function and the like. So touch on what you see
the problems are and then what the Treasury Department could do
using the TARP that could be responsive, including their work in
TALF or whatever comes to mind.

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Mr. BARRY. Well, I’d like to take that one more time. I don’t
know what the answer is. What I can tell you is that we get the
impression that there is blockage. That whether it is a capital problem, a liquidity problem, or a direction that the banks do not want
to take—but any more real estate, regardless of what type it is,
they don’t want to make any deals.
Mr. SILVERS. Now, what size bank are you talking about
when——
Mr. BARRY. Well——
Mr. SILVERS. When you’re looking for financing, who do you start
with?
Mr. BARRY. Well, the St. Louis deal was a 150 million, and most
of the other FBI facilities that are under a lease to build, they are
in the 55 million range. As such, we go to all the top banks in the
country.
Mr. SILVERS. And they’re not lending?
Mr. BARRY. They’re not willing.
Mr. SILVERS. Others?
Mr. OLASOV. It’s probably worthwhile to put some parameters on
this. If we look at who holds commercial mortgages right now, and
obviously that springs from the original source of the lending.
You’ve got 3.4 trillion. Of that, you’ve got about 1.3 trillion in commercial mortgage banks. You’ve got another 700 billion in CMBS.
You’ve got about a quarter of a trillion dollars in life companies
and then the GSEs and pensions and others kind of play into that.
So, obviously, the commercial banks have been the largest source
of commercial mortgage lending over time apart from the multifamily market that Mr. Stockert was talking about before.
Now, let’s take a look at where we are. Life insurance companies
are actually back in the market. There’s a certain kind of life company product that they might be allocating 30 billion dollars to
what might be a four to five-hundred-billion-dollar ask this year.
Commercial banks are shrinking their commercial real estate portfolios for lots of very obvious and justifiable reasons, including regulatory pressures, and, again, the preservation of regulatory capital.
CMBS might see ten billion dollars. It got up to 230 billion dollars in 2007. That’s not going to be the source of lending. So we
have to go back to commercial banks, which puts it back at the feet
of TARP and COP. The way to get there, in my estimation, is to
start with what motivates banks to lend or not to lend, which is
the preservation of regulatory capital. And that’s why the white
paper that I have addresses the opportunity to allow banks to start
stripping out problem loans. And in the presence of those problem
loans, they are not going to continue to lend—for all the vagaries
that we discussed before.
Chair WARREN. Thank you. I just want to stay on time, but I
hope we can come back to this. Let me just say for those of you
who may have noticed. We had originally scheduled this hearing
for ten to 12:00. I think this is very valuable. If you can stay a few
more minutes, what we’d like to do is finish this round of questioning and then do a lightening round, one more round of short
questions. And then we want to be able to take comments from
anyone in the audience who would like to come forward. We’re

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going to have to keep them very brief, but we’d like to do that. So
I hope we can get everyone out of here in maybe about 15 minutes,
ten or 15 minutes. But if you can bear with us, we would be grateful for that. Mr. McWatters?
Mr. MCWATTERS. Thank you. Tell me about your access to foreign capital, through either U.S. managed hedge funds or other
sources, and specifically what role FIRREA has played for an investment in the Real Properties Tax Act, and also some of the
other restrictions that may be placed upon potential foreign lenders
who make loans in the U.S. Any thoughts?
Mr. BARRY. The one FBI facility that we’re very close to getting
done is with a Swiss institution providing a letter of credit.
Through investment banking, selling bonds, and using that letter
of credit as collateral, we’re real close.
Mr. MCWATTERS. Okay.
Mr. BARRY. And we’re beginning to see some of that. We went
had long, long conversations with the Japanese, similar conversations. They’re not quite ready. It didn’t happen, but we spent several months with them.
Mr. MCWATTERS. And there have been no discussions with sovereign wealth funds or hedge funds?
Mr. BARRY. No.
Mr. MCWATTERS. Mr. Elliott, any thoughts?
Mr. ELLIOTT. I think they are impacted with the same fundamentals that U.S. banks are, which is until there is a reasonable return
or they can price themselves in a way that would be attractive for
a developer to get a return, they are not going to get in the market.
But being responsive to your question of whether there are regulatory issues that they face, I haven’t seen that. That’s not suggesting they don’t exist. I just haven’t seen it.
Mr. MCWATTERS. Okay. Mr. Burnett, I assume you don’t have a
response, but Mr. Stockert?
Mr. STOCKERT. We really haven’t encountered a lot of international capital confidence.
Mr. MCWATTERS. Well, are you involved with the REMIC rules?
They have been liberalized lately, making them a little more userfriendly, but they still seem to, at least what I’ve heard from some
people, impair the flow of capital.
Mr. OLASOV. We deal extensively with special servicers and
CMBS. I’m getting ready to go out to Las Vegas to moderate a
panel with them. And they consider the liberalization that came
out of the IRS back in September to be a complete non-event.
Mr. MCWATTERS. Okay. That is what I’ve heard also. How would
you suggest modifying those rules, the REMIC rules?
Mr. OLASOV. Well, it doesn’t lend itself to a 30-second schedule.
I’m not—honestly, I’m not sure that—that the REMIC restrictions
are what ties up the special servicers. I don’t think that it particularly ties their hands in seeking the highest NPV resolution.
Mr. MCWATTERS. We’ve heard a lot about special servicers and
conflicts of interest and the like. What’s your perspective on that?
Mr. OLASOV. Again, I’ll try to keep this brief, but you’re raising
some very fraught topics. I would say that there was a bargain
made really going back to the RTC days that kick started the new
CMBS market. That in bulk, the alignment of interest between

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special servicers and B-piece investors, those bond investors holding the riskiest piece of the CMBS, was on net a good thing, not
withstanding the conflicts.
In retrospect, I think a lot of people would argue that moving the
discipline, of those B-piece investors out of the CMBS through
CDOs, collateralized debt obligations, where they fervently took
their equity off the table, should be reconsidered.
Mr. MCWATTERS. Okay. Thank you. My time is up.
Chair WARREN. Thank you. Mr. Neiman.
Mr. NEIMAN. Thank you. My question goes to Mr. Burnett. I am
very interested and appreciate your candor with respect to the receipt of TARP capital and the experience that you had. I would like
to have a clear message, though, as to some recommendations that
you gave to us with respect to the use of TARP funds for community banks. I’m getting a sense that you do not feel that TARP has
been sufficiently responsive to the needs of community banks. At
our last hearing with Secretary Geitner, we pressed him on the details of the October program they announced, which was specifically directed to community banks and tied to specifically to small
business lending. He responded that there was a reluctance from
those banks to participate because of a stigma. Could you talk
about the need for additional TARP funding through capital programs and how can it be changed, if you do support those, in order
to make it more receptive to bankers?
Mr. BURNETT. Well, I think that any time that private capital is
available versus public capital, as a business person, I would
choose that route to benefit the taxpayers. However, I think that
at this point, public capital, at least in our sector of the industry,
is simply not available from institutional levels, and there are numerous reasons for that. One of those is primarily—we’ve now created a system of shelf charters where a charter can be obtained
and then capital can be raised from institutional investors to buy
failing banks with FDIC assistance. I’ve had numerous institutional partners say, why would I invest in your bank, when if I
hang around long enough, I may pick you up with an 80 percent
agreement? So those sorts of transactions have taken public capital
virtually out of the market.
That and the general concern on what the future of smaller
banks is. I think Secretary Bair has said openly addressed the
number of failures forthcoming. And investors don’t know what to
expect from Washington, in terms of closures this year or next
year, so they are sitting on the sidelines.
So it is perhaps TARP that may be the only source of capital for
banks in our sector. If you look at TARP across the board, I believe
about eight percent of all U.S. banks receive TARP. I think there
were 26 here in Georgia.
Mr. NEIMAN. If you would support seeing an expansion of those
programs for community banks, how would you change the program in order to implement it more effectively?
Mr. BURNETT. I would support seeing an expansion of the TARP
program. I think, in all candor, the conditions are going to have to
be changed. I know in our case a year ago, when we applied our
company was in better shape than it is today, but because community banks were put at the very bottom of the stack of the applica-

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tions by the time they got to any of those banks, the deteriorated
banks no longer met the standards.
Mr. NEIMAN. So, recognizing the limitations on raising private
capital in this market, how would you describe the reluctance of
community banks to participate in TARP programs, particularly
the October program announced with respect to small business
lending?
Mr. BURNETT. In all candor, in my circles, I have not found
banks that were reluctant to participate. What I found in Georgia
is the bank’s applications simply were not acted upon.
Mr. NEIMAN. I want to also ask Mr. Stockert. What is the most
important message that we should leave here with respect to the
impact CRE is having on affordable housing and any proposed
changes that we should be recommending to Congress or the Treasury to address those concerns on the impact on affordable housing?
Mr. STOCKERT. Well, very clearly, and I said in my remarks, we
feel that preserving the GSEs that are providing the good, sound,
liquid financing to our industry is very important. And beyond
that, we don’t really deal with affordable housing per se, but I certainly can get you some more information on other suggestions we
might have in that realm.
Mr. OLASOV. Excuse me, Superintendent Neiman, I feel very
forcefully about this, and I just wanted to support on very strong
terms what Chris was talking about. And, obviously, there are
some alternatives, in terms of promoting community and regional
banks and attracting new capital. We’ve had a number of discussions with the FDIC. I think Mr. Atkins talked before about the ‘‘F’’
word, forbearance. I know that’s a bad term, but at the end of the
day, the FDIC is chartered to find the least cost resolution. If you
take a look at a 140 bank failures last year, the estimated losses
against total assets was 25 percent. We’ve reached out with a number of institutions to find some form of matched funding where possibly open bank assistance could be provided along with investment
on a subordinated basis. That’s in conjunction with what one of
your previous witnesses, I think Charlie Calomiris, talked to you
about—the need to put public subsidies in a senior position to private capital. Not being able to do that means that you’re going to
restrict new private capital coming into banks, and everyone agrees
that the banks need to attract new capital.
Mr. NEIMAN. And doing that through FDIC programs.
Chair WARREN. So let me just follow up in a slightly different direction on this same question. I think part of the question we are
trying to ask is what works best to get new money into good
projects, whether it’s refinancing the existing projects or it’s trying
to finance new construction. And we’ve heard a lot about the extend and pretend softening with accounting standards and so on.
We talked about loss recognition and the problems associated with
loss recognition. I want to start with you partly because of your
written testimony and what you’ve been saying here today, Mr.
Olasov, but we’re going to be short on time. But do you want to
take one swing at how we should be thinking about that problem?
How do we get the money in the banks, and then out of the banks
into the projects?

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Mr. OLASOV. I think that it all starts with cleaning up balance
sheets. If you take a look at bank crises around the world, we’ve
got some very good examples of what happens when there are not
deliberate actions taken. Japan, obviously, is always a hot topic.
And I remember meeting in mid 1990s with the Japanese DIC,
where year after year we would go through this same dance with
them that never led to any kind of outcome. It all had to do with
papering over the problems with the Japanese banking system. My
fear is that we’re going to prolong the agony unnecessarily by not
dealing with the removal of problem assets in a way that does not
necessarily entail impairing regulatory capital.
Chair WARREN. Thank you, Mr. Olasov. Mr. Stockert.
Mr. STOCKERT. Similarly I would say make sure the rules are
clear. If we all know what the rules are, we can figure it out. And
then the second thing is facilitate price discovery, because that’s
what we’re all saying. I don’t think that that’s fully baked in at the
banks. I think that’s the big bottleneck. Going back to the affordable housing question for a minute. The housing policy in this
country has got to be more balanced. Multifamily apartments are
affordable housing, all of them. To live across the street at Post
Biltmore, you cannot buy a single family or condominium for anything like what you can rent one of our professionally run, well-appointed apartments. So balance the housing policy.
Chair WARREN. Thanks very much. I’m out of time. Mr. Atkins.
Mr. ATKINS. Well, it’s too bad, I mean these are some important
issues that we’re talking about here, liquidity and capital issues.
Ironically, of course, TARP was set up to buy troubled assets, but
many of us at the time thought that was going to be impossible because of the valuation issues, regulatory ramifications, and just
human nature. And so the public-private partnership is more of a
battle still because of those basic issues. So how do we solve this
morass, which is essentially what it comes down to, banks holding
onto assets and not wanting to sell them? Mr. Olasov, or others,
I was wondering if you had any quick suggestions?
Mr. OLASOV. Yeah. In fact, I was invited to talk to the OCC
about CRE problems a couple of months ago. And I said, by way
of establishing my bona fides, that I am an enormous proponent of
fair market value accounting, but—and this is important—I think
the hole that we’re in is so deep right now. We can talk about numbers later on offline. I’d rather not talk about it online, to be honest
with you. I think the overhang of debt in both the residential and
commercial markets is so chilling that we’re going to have to start
looking at some kind of deferred loss accounting.
Mr. ATKINS. Those are fighting words.
Mr. OLASOV. I say that very reluctantly.
Mr. ATKINS. Anyone else?
Chair WARREN. With that breathtaking thought, maybe we
should go to the next question. Is that all right?
Mr. ATKINS. I’m out of time. Yes.
Chair WARREN. Mr. Silvers.
Mr. SILVERS. Just to show you how much in sync I am with my
friend Mr. Atkins, I want to put this in language that a listener
might understand. Mr. Olasov, if we were to take these troubled
assets off of bank books, as you’re suggesting we must, and you

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mentioned Japan. I don’t think it’s possible to repeat that problem
too many times. If we’re going to do that, not at the prices in
March 2009 but at today’s prices, what would the solvency of our
banking system look like?
Mr. OLASOV. I actually don’t think that it would be prudent for
me to answer that online, to be honest with you.
Mr. SILVERS. All right. Well, the reason why I raised it—I invite
others to comment—it strikes me that when we talk about a capital
problem, what each of you and what our prior panel, much to my
surprise, seemed to be saying, is that we just don’t have enough
capital in our banking system for the assets of our banking system
to be deployed properly. Now, I’m not speaking, obviously, with respect to any particular bank, but across the system that seems to
be the case, and I think we’ve heard this over and over again. And
so what I pose to you all is we need to get these assets off the
books, and do so at any realistic price—and I remind you, we’ve got
160 billion dollars in unallocated TARP assets. This would be if
we’re going to do something in TARP. That’s for the entire financial
system. It suggests that we’re just looking in the wrong place. It
strongly suggests to me, at least, that you can’t have this conversation without talking about restructuring the liabilities on bank balance sheets. There’s no other way out. And this is actually where
Japan ended. And I invite any comments before my time is up.
Chair WARREN. No, you don’t. Your time ran out.
Mr. SILVERS. My time ran out.
Chair WARREN. We’re going to get there and we are going to do
some comments. That’s why I’m trying to be disciplined about this.
Mr. McWatters, before I call you for your two minutes, I’m going
to say that I very much appreciate each of you coming. I appreciate
this. I wish I could stay and hear the rest of the panel. Like everyone else, I am at the mercy of Delta Airlines and an obligation back
in Boston that I must get back to. Since the rest of the panel will
still be here, I’m going to hand the gavel over to the deputy chair.
I will watch the rest of this on video. But thank you very much.
I wish I could stay and talk about this. Not just for the rest of the
day, but for the rest of the month. Thank you.
Mr. McWatters.
Mr. MCWATTERS. Thank you. Each of you have described problems, and that’s basically what we’ve heard today. We wouldn’t be
having this meeting, if there weren’t problems. If you can take two
sentences, three sentences each, what’s a solution? The succinct, almost sound bite type solution to the regulatory problems, accounting problems and the like, if that’s possible.
Mr. BARRY. Let me just start with kind of a broad statement.
Somebody mentioned a soft landing for the commercial real estate
industry. We see the focus on the taxpayer, rightfully so. We see
the focus on the banks, on residential moratoriums, mitigations as
opposed to foreclosures. But the general feeling that the banking
community gives us is that we need some love. We need banks to
understand the problems that we have. We need the banks to also
understand the potential of what we bring to the table. When I go
back over the investment dollars that we channeled into communities, when I think of the jobs that we created in the overall economy, what we do as commercial developers is very positive. But the

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commercial world is in trouble and taking everybody down, and
that’s an awful lot of people. I must say that most of them are in
the single family development side as opposed to the commercial
side. But the commercial real estate world is in a world of hurt.
And if there’s a way that you could think about how to give some
help to the commercial developers, it would be great.
That wasn’t the answer you were looking for, but time has expired.
Mr. NEIMAN. I’d like to go back to our discussion particularly
with the first panel regarding the CRE guidance. And I’d like to
give Mr. Burnett an opportunity to respond and maybe some of the
developers and others on the panel as well. How do you assess the
impact and the effectiveness of that guidance, if the intent was to
encourage banks to restructure CRE loans and to take write downs
where required? Will it meet its objective? Is there other guidance
or regulatory action that’s needed?
Mr. BURNETT. I am pleased with components of the CRE guidelines. I do think that they will allow us to deal with our problems
more prudently. Someone had used the term ‘‘kick the can down
the road.’’ Well, right now, if you didn’t kick the can down the road
and you truly wrote property values down, we don’t know the depth
of the capital hole. But if we believe that our markets are going
to recover, and as long as those borrowers can continue servicing
the debt even if it’s through restructuring, then it is better to move
that problem down the road as long as we have appreciating property values. And I think that’s the real key determinant, do you
have properties that are depressed today because of the situation
we are in, but in the long term are still are viable, valuable assets.
Mr. NEIMAN. Does anyone want to comment on that?
Mr. ELLIOTT. I think it’s a positive step in that it allows the
property to stay in the hands of good sponsors. I think maybe you
made a point earlier about one danger of not good sponsors is actually accelerated deterioration of assets, which is not a good thing.
So I do think it’s good keeping the property in the hands of good
sponsors. It’s not doing anything on prompting new loans though.
Mr. NEIMAN. Thank you.
Mr. SILVERS. Well, with that, this panel is excused. We very
much appreciate your willingness to stay a little longer than we
had promised. And if there are members of the audience, the Congressional Oversight Panel makes it a practice in field hearings to
invite comments from the audience. Please limit your remarks and
questions to one minute. There is a microphone up front. Please
walk up to the microphone and introduce yourself.
Mr. MOORE. My name is Ray Moore, and——
Mr. SILVERS. Just give these folks a chance to get——
Mr. MOORE. I was hoping these gentlemen would stay and listen.
I would suggest they stay and listen. My name is Ray Moore. I’ve
been in the commercial real estate business for 35 years. And I’ve
sat here and listened to these gentlemen cry about their particular
problems. What they are doing is crying. I would suggest to Mr.
Barry that when the project was going very well, Mr. Barry could
have paid for that land and had equity in that land, and we
wouldn’t be here. I called Senator Johnny Isakson, the individual
who empowered this board. He was the one that made it. He spent

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21 million dollars of our taxpayer’s money for you guys to come out,
and I would suggest that what you all are doing is you are looking
out here at the symptoms. And you are hearing all of the problems.
You are out here at the symptoms. We need to go back and understand. I thought what this board was going to do—I inquired to get
on this board. I was told that I did not have the national reputation to get on this board. It would have been very short because
the problems we’re facing today started back in 1999 with Fannie
Mae and Freddie Mac by pressure from Congress and the administrations ever since to implement social programs.
Mr. SILVERS. Sir, your one minute is expired. Do you want to
wind up?
Mr. MOORE. I would like to say this. This is a situation where
you guys are supposed to be looking at why we got here, not looking at the symptoms out here. You are supposed to look at the reason. The reason—if you go back and see the reasons——
Mr. SILVERS. Sir, I would ask you to wind up. We mean it when
we say one minute.
Mr. MOORE. If you look at the reasons why we get here, it becomes obvious to the problem. What they have done is they have
overleveraged. These individuals——
Mr. SILVERS. Sir, I’ve asked you for a third time. Please sit down.
Mr. BOWERS. I’ll try to keep my remarks to one minute. I would
love to write you all a letter. I am Richard Bowers. I have a firm
Richard Bowers & Company. I own downtown properties and suburban properties. I lost a property that was a commercial mortgage-backed security. I paid on time every time for ten years,
couldn’t get it renewed. So that’s very disappointing. I really believe this economy was created in September of 2007, when virtually all liquidities stopped in the marketplace. And from that
point on, from a brokerage firm and from singular developers, there
was no liquidity. Demand couldn’t be served. That is the sale of
real estate. Values went down. In fact, it was like getting thrown
off the top of your building. And employment went down because
businesses couldn’t get their funding or lines of credit extended. So
what we’ve created is the greatest devaluation in personal wealth
ever, the highest unemployment, which is a lot higher than ten
percent. And the greatest debt per capita that we’ve ever had, I
guess, in the world. I do believe that liquidity is the answer for the
market, and there is none at least from where I sit as an entrepreneurial property owner. We go to these banks——
Mr. SILVERS. Sir, I have allowed you to go over as a speaker, but
if you want to wind—if you’ve got a final——
Mr. BOWERS. Well, I mean, I don’t believe there’s liquidity in the
marketplace despite what some of these people say. The regulators
have been over-scrutinizing the banks in my opinion, or the banks
are afraid to make loans to reputable businesses and business leaders. I also believe that a lot of this could have been much better
handled than it was and still might be satisfied if liquidity could
be provided. But I really do believe that either through tax benefits
or government underwriting of some commercial loans, either go
back 15 or 20 percent, but some of this could be avoided. Otherwise, you are just going to end up bankrupting every entrepre-

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144
neurial real estate owner, in my opinion, that has a loan turnover
in this country. Thank you.
Mr. SILVERS. Thank you, sir. Sir.
Mr. BOYD. My name is Bob Boyd. I’m a commercial real estate
investment broker. We have a large amount of capital looking for
opportunities. And we have dealt with a majority of the Atlanta
banks over the last two years looking to buy toxic assets. The difficulty in making those deals happen is a function of the asked
price versus the bid price. And the inability of the banks to release
those assets to buyers who, in most cases, would pay all cash to
buy those opportunities. As long as that continues, those opportunities don’t present themselves to the marketplace. In addition, once
a bank is taken over by the FDIC, that very same asset that has
been part of our target in the marketplace that we understand,
goes to an FDIC pool where it’s completely lost in some pool purchase and as a result is sold at a much lower value than what our
original offers have been. And that continues to be a problem.
Mr. SILVERS. Thank you. Is there anyone else who wishes to
speak?
Mr. ATKINS. I just wanted to respond to—I would love to talk offline with the gentleman who spoke at the beginning. But just to
clarify this panel here is charged with overseeing what’s happening
with the TARP program. There’s another commission, the Financial
Crisis Inquiry Commission, which is looking at the origins of what
happened. I happen to agree with you that Fannie Mae and
Freddie Mac actually are probably a huge problem obviously in the
residential mortgage area as well as the commercial area. But you
know that is not necessarily what we are dealing with here. But
I don’t want to open——
Mr. MOORE. I didn’t realize that this was a separate group. He
asked his question. I would like to respond to it. I would just say
that TARP funds need to be used to create jobs. Our whole economy is kept up—it’s like a balloon. Not everybody breathes confidence in it. All of our citizens breathe confidence in this big balloon. And so we need to get individual citizens breathing confidence
back in this balloon and the problems are solved. Use those funds
in there to get jobs to people out here. They are worried about jobs.
Job creation is what this needs to be about. And the TARP funds
don’t need to be—these guys make mistakes. Real estate is a cyclical business. The bankers keep doing the same thing over and over.
The developers keep doing the same thing over and over.
Mr. SILVERS. Everyone who spoke had a time limit. I very much
agree with your comments, but everyone who spoke had a time
limit. Let me just say that—I can’t speak for the other panel members, we each have our own travel plans—but I’m available. I suspect maybe other panelists are available too to continue offline
these conversations. We do have time rules, and it’s only fair to
stick to them.
On behalf of the Congressional Oversight Panel and our Chair
Professor Warren, I wish to thank Georgia Tech for their hospitality and help and call this hearing adjourned.
[Whereupon, at 12.35 p.m., the hearing was adjourned.]

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