Stephen’s Posterous

Ralph Cioffi and Matthew Tannin, two former Bear Stearns hedge-fund managers, were acquitted of securities fraud. They were accused of lying to investors by telling them that they were optimistic about their funds, while privately worrying about the funds.

The funds collapsed in 2007, prior to the mortgage crisis that later took Bear Stearns down. The acquittals are a setback for the U.S. attorney's office in Brooklyn, New York.

Many U.S. attorney's offices are investigating Wall Street for possible criminal wrongdoing that lead to the credit crisis and affected many large companies like Lehman Brothers, Fannie Mae, and AIG.

This case came down to this simple question: Were the two men misleading investors, or simply putting a positive spin on sagging returns?, writes The Wall Street Journal writers, Amir Efrati and Peter Lattman.

The Jurors in Brooklyn found there was no evidence beyond a reasonable doubt that the defendants had criminal intent and conspired to mislead their investors.

Messrs. Cioffi and Tannin were the first and only Wall Street executives to face criminal securities-fraud charges resulting from the crisis.

The two former hedgefund managers faced a maximum of 20 years in prison for each of the five fraud counts and five years on a conspiracy charge, if they had been convicted.

The government displayed supposed incriminating emails by Mr. Tannin in which he expressed his fear about the markets in 2007. Defense lawyers said the prosecutors were taking the emails out of context.

What the email showed was that Mr. Tannin also said the men could choose to make aggressive bets rather than close the funds, the lawyers argued. The Jurors believed the defense's narrative.

Cioffi and Tannin still face a civil-fraud lawsuit, which was brought alongside the criminal charges last year, by the Securities and Exchange Commission. John Nester, an SEC spokesman, said the agency expected to go forward with the litigation.

Someone commented on the article in the Wall Street Journal writing, "Great decision. Finally we can look beyond finding scapegoats and work towards rebuilding the financial institutions in this country."

Source.

Eli Broad is an American billionaire who lives in Los Angeles. Mr. Broad, pronounced like the word road, is a native of Detroit. Mr. Broad is known for his philanthropy and extensive art collection, and has been known as a major supporter of the cultural profile of Los Angeles.

He made his initial fortune in real estate at his company, Kaufman & Broad. He is ranked as one of the 100 richest people in the world. He is the founder of SunAmerica, now a division of AIG, and was CEO of SunAmerica until 2003. Mr. Broad's net worth is estimated at $5.2 billion.

In the Los Angeles Times, Pat Morrison has a new column every Saturday called "Patt Morrison Asks," where Pat Morrison interviews both fascinating and important people.

When Pat Morrison asked Eli Broad about why he was so devoted to Los Angeles, Mr. Broad responded:

Remember where I come from: a lower-middle-class family, born New York City, raised in Michigan. I came here 46 years ago. It's a meritocracy. I've done well here business-wise.

I've been accepted at doing things with the civic world and the art world. I love the city. It suits me. I could live anywhere in the world I want. But Los Angeles is the place to live.

When asked about the economy, Mr. Broad responded:

It's not any longer simply about how much money you have, what your assets are worth. The happiest people I've found are in science. These people have three times the IQ -- maybe I'm exaggerating. They have a higher IQ than I do. They love what they're doing, they have a good family life, they're satisfied.

People are going to take a look at how we define wealth, and not just in financial terms. They'll ask, what am I accomplishing? What am I going to leave behind? What am I doing with my kids? How am I going to help my community? I've not led a balanced life. If I had it to do over again, maybe I might lead a more balanced life. But then, I probably wouldn't have accomplished the things I have.

Source.

Who Moved My Skull and Crossbones? By Lewis Perdue, Barrons.com

If AIG had been managed half as well as the average 18th-century pirate ship, it would never have shot itself with its own cannons, and dragged down every other vessel in sight. But it wasn't. And it did.

Pirates, on the other hand, turn out to have created remarkably effective systems of governance, a rational system of operation, an effective method of incentives, discipline and even a way of branding their terror in such a way as to minimize injury to both people and purloined treasure.

"Peg legs and parrots aside, in the end, piracy was a business," writes Peter T. Leeson, the BB&T professor for the Study of Capitalism at George Mason University. "It was a criminal business, but a business nonetheless and deserves to be treated in this light." Today's Somali pirates view their work in much the same way, although their victims certainly don't, as recent events have shown.

Leeson hangs the meat of his pirate tale on a sturdy skeleton of economics. Indeed, the title, The Invisible Hook, is part homage to Adam Smith's "invisible hand," which guides those seeking to satisfy their own self-interest into the sort of cooperation that serves the self-interest of others.

"Although criminals direct their cooperation at someone else's loss, if they desire to move beyond one-man mug jobs, they must also cooperate with others to satisfy their self-interests," Leeson writes. "A one-man pirate 'crew,' for example, wouldn't have gotten far. To take the massive hauls they aimed at, pirates had to cooperate with many other sea dogs."

Of course, AIG's cooperation with other economic scoundrels is well-documented, but the pirates of yore were smarter at preventing self-destructive acts that could all-too-easily sink their ship. "Although pirates were lawless, they weren't without laws," says Leeson.

Private "pirate governance needed to provide rules to prevent inter-pirate conflict and to enforce these rules; it needed to regulate pirate behavior that produced 'negative externalities'...."

To that end, pirates created documents that were a mash-up of a constitution, articles of incorporation, bylaws, a judicial system and a penal code. And while codes varied from ship to ship, the majority were remarkably similar and usually required unanimous approval by all aboard a single vessel, or all aboard all the ships in a pirate fleet.

As part of these governing principles, Leeson tells us, the captain of a pirate ship was elected by the crew members and could be removed by their vote.

"It's truly remarkable to think that this model of democracy was staged not only on a pirate ship, of all places, but took place more than half a century before the Continental Congress approved the Declaration of Independence, and...nearly 150 years before the Second Reform Act of 1868 accomplished anything close to the same in Britain," Leeson observes.

But, Leeson emphasizes, "pirate democracy didn't emerge out of pirates' adherence to romantic, democratic ideals about man's right to have a say in who governs him. It emerged out of pirate profit-seeking, a la the 'invisible hook.' "

That same invisible hook was responsible for what Leeson calls "Equal Pay for Equal Prey." He presents a spreadsheet showing that the non-white racial composition of pirate crews ranged from 13% to 98%.

"None of these pirate companies were all white," Leeson writes. "Economic concerns, not lofty ideals, drove pirates to enroll black sailors as paid, full-fledged crew members. Pirates, after all, were profit seekers, which means they cared more for gold and silver than they cared about black and white."

Simply put, a pirate crew valued talented, able-bodied men regardless of ethnic origins. In addition, Leeson points out, black slaves or conscripted white crew members were bad management and financial liabilities because they could rebel, deliberately fight poorly to help the pirates lose, and find ways to turn the pirates over to authorities.

Furthermore, the author tells us, the skull and crossbones was a powerful brand because it conveyed the prospects of brutality so thoroughly that pirates rarely had to kill, maim or mutilate. This, of course, boosted profits by minimizing damage to the booty and to the pirate crew.

Leeson even offers a syllabus and reading list for "Professor Blackbeard's Management 101" course. It's a tragedy no one in the financial industry studied this course. Had that been possible, they could still be rapaciously fleecing the public, but without bringing the whole system down around everyone's ears.

The Invisible Hook is a delightful read, thanks to Leeson's engaging writing. He reduces a veritable mountain of facts and history into an entertainingly educational experience.

Barnet Frank on the Financial Road Ahead by Avi Salzman, Barrons.com

Rep. Barney Frank (D., Mass.), the chairman of the House Financial Services Committee, has been one of the busiest men in Washington in recent months. So busy, in fact, that when a Barrons.com reporter started a telephone interview with him recently, he dispensed quickly with the formalities.

"Let's go," he said, in an accent that betrays his northern New Jersey roots, before embarking on a wide-ranging interview on whether to nationalize banks, how to rate debt, and how long mark-to-market accounting rules will remain relaxed.

You have talked a lot about the federal government having a systemic risk agency, with the Federal Reserve overseeing it. How would it work?

The Fed took a bit of a roughing up over the AIG bonuses, so it is now unlikely that it would be the Fed alone, though the Fed will have to play a major role. At this point there is more agreement on what than who. It has to have a systemic risk capacity to keep in particular nonbanks from getting overly leveraged.

Are you interested in limiting the size of banks?
 
No. There are always the antitrust laws, but if you look at a typical antitrust law, that doesn't work because no bank is big enough to be that kind of monopoly. By the way the problem seems to be less banks than nonbanks.

I think the problems were with Lehman and AIG and Bear Stearns. What I want to do is to have a systemic risk regulator that keeps any entity from getting so heavily indebted beyond its capacity to pay that it becomes too interconnected to fail.

And who will determine what overleverage is? How much leverage is too much?

A systemic risk regulator [will determine it]. It's in two ways; it's an individual situation and it could also be if too many people get in the same side of the boat it starts to tip over.

Paul Krugman, the liberal economist who just won the Nobel Prize, has talked about banks having to be nationalized to save the system. Is that something that you feel the Obama administration should do?

The president addressed that pretty well. As far as banks being nationalized, which banks? How many? All banks? Ten banks? Three banks? One bank? I mean, of course, I would not rule out a bank being nationalized. It is a tool that might be necessary, but it ought to be a much later resort than now. I don't see any need to do it now.

Some concern has been raised about pension funds investing in hedge funds. Should the government regulate pension investments in hedge funds?

I have limited jurisdiction over that because the pension funds are under Erisa [Employee Retirement Income Security Act], which is in the Education and Labor Committee. They are talking about some kind of safeguards.

I do believe that the hedge funds should be among those entities that are not allowed to get too leveraged, and I believe that they should be required to register with the Securities and Exchange Commission.

And give data on how much leverage they are using?

Well the SEC wouldn't be primarily [overseeing] the leverage thing -- they would be an investor and consumer protection entity. The systemic risk regulator would be looking at leverage with them as with any other entity.

So a systemic risk regulator would have access to the amount of leverage that hedge funds are using.

Any financial entity, yes.

How is the government going to make investors comfortable investing in financial markets? Some investors say that the rules have changed a lot. What's the timetable [on the rule changes]?
 
By the end of the year. I hope by the time Congress adjourns for the year, which may be very late this year. Yes, there is uncertainty now. I do think it's important to provide that kind of stability, and this is a case where regulation is very pro-market because it should give people that assurance.

What reforms do you mean specifically?

The systemic risk regulator, a way to resolve nonbank institutions, a buffing-up of the investor-consumer protection functions at the regular regulators. A change in compensation rules so that people cannot give one-way bonuses and then incentivize excessive risk, and rules that say you can't securitize 100% [of a loan].

You have to retain say 5%, but it still has to be worked out. A fundamental part of the problem was that 100% securitization led to a significant drop in people's focusing on the quality of the loans they made.

Are the credit-rating agencies fundamentally flawed? Does the government need to step in and in what capacity?
 
First of all, the thing to do about rating agencies is to make them less important. If there are enough flaws [with the debt] in the beginning, there is nothing they can do about it. The payment model clearly ought to be changed.

There were biases that grew from the fact that the [corporations] being rated were paying them. I have not myself [figured out] what the best way to do it is -- whether you have investor-paid models or whether there is a government model. Clearly the current system needs to be replaced.

Do you feel that Goldman Sach's (ticker: GS) move [to try to pay back TARP money] is problematic because it could expose other banks in the eyes of investors and the public?
 
No, I am all for it. It is a very good idea. In the first place the notion that 'Oh, if Goldman pays the money back people will know that some institutions are stronger than others' is ridiculous. People already know that. There are all kinds of metrics for deciding which financial institution is strong and which one is weak.

Now do you think that TARP and the PPIP [the government's Public-Private Investment Program to buy up bad assets] will be enough money to get us out of this or are you going to need to have more money?

They are going to have to do the best they can right now. Of course with the PPIP they have gotten the FDIC [Federal Deposit Insurance Corp.] involved as a way to get that going. I do not think there is any prospect of Congress voting more money until and unless people start to see some results.

That is why I am in favor of the TARP money being paid back -- to the extent that you get some substantial repayments of TARP money if you do need more money for some other purpose later on.

As far as mark-to-market accounting reforms, do you think the rules should continue to be relaxed?

Yes. It's indefinite. What is temporary is the discretion that the regulator should show. There are two aspects to mark-to-market. One is the actual valuation, and two is how the regulators react. I do think that at a time like this there is a reason for some administrative and regulatory discretion and that would be temporary.

If things get better then you don't have that same kind of forbearance. As to the mark-to-market rules themselves, they were a little bit too rigid. They didn't differentiate sufficiently it seemed to me between assets held for trading and assets (that were paying assets) that were to be held to maturity. And [the reforms to that are] not going to change.

Are we papering over some of the larger systemic problems in the system by changing or relaxing mark-to-market right now?

I think that's nonsense. It's a straw man. It's not what we are doing in mark-to-market. If you are holding an asset and you plan to hold it until maturity and it is paying as it was supposed to, I don't think you should have to mark it down substantially. The federal home loan banks in a couple of areas were forced to do excessive markdowns. It's not either or -- it's how well you do it.

Do you think that Obama has the right people in charge right now of economic and financial matters?
 
Yes.

Some of the concern is that maybe these guys are too close to some of the people they are regulating. I'm talking about Tim Geithner and Lawrence Summers for instance?
 
I don't think that's true. Who did you think I meant? Frick and Frack?

Source.

Jim Rogers Isn't Buying a U.S. Stock Rocovery by John Kimelman, Barron's Online

Bank executives and investors can breathe a sigh of relief: Jim Rogers has covered the short positions on financial stocks he put in place ahead of last year's massive meltdown.

But just because this influential investor isn't betting that big banks will fall much further doesn't mean he's confident they will stage a lasting rally either. He feels similarly about U.S. stocks in general.

"I am skeptical about the rally, and the world economy for the next year or two or three," he says. "But if stocks go down, I can make money with commodities."

Rogers, now 66, gained fame as George Soros' hedge-fund partner in the 1970s and 1980s. After retiring from professional money manager in his late 30s, the Alabama native tooled around Europe, Asia, Africa, and Latin America visiting emerging markets, one by one. His resulting book, Investment Biker, helped to popularize emerging market investing at the outset of a bull market for the sector.

He also helped to popularize commodity investing, which for decades was the province of niche investors. In the 1990s, he developed commodity indexes based on futures contracts that in recent years have been turned into exchange-traded funds available to all investors. His 2004 book, Hot Commodities, came ahead of a surge prices for energy, metals, and agriculture.

Since its inception in July 1998, the Rogers International Commodities Index has gained 158%, while the S&P 500 has fallen 23%. And that gain for the commodities index comes despite the fact that it's lost more than half of its value since last July. At these levels, Rogers has been a buyer.

These days, Rogers, now 66, is sticking close to home in Singapore with his wife, Paige Parker, and two small daughters. He's about to release his latest book, A Gift to My Children: A Father's Lessons for Life and Investing in which he encourages other people's children to travel widely and learn Mandarin so they can reap the rewards of China's economic boom.

Recently, Rogers talked to Barrons.com by phone from his Singapore home.

When you last did a lengthy interview with Barron's magazine a year ago you were lightening up on emerging markets investments. Well, you called that one right. But now that many of those markets have fallen from their highs of recent years, are you more optimistic?

No. I've sold all emerging markets stock except the ones in China. I bought more Chinese shares in October and November during the panic, but I have not bought China or any other stock markets including the U.S. since then. I'm not buying anything in China right now because the Chinese market ran up maybe 50% since last November.

It's been the strongest market in the world in the past six months and I don't like jumping into something that has been that run up. Still, I'm not thinking of selling these stocks either. I think if it goes down I'll buy more. I think you will find that it's the single strongest market in the world since last fall.

In your latest book, you talk of China as the great investment opportunity of the 21st century, just as the U.S. was in the 20th century. What percentage of a typical American investor's portfolio should be in China?

If they can't even find China on a map, I don't think they should have anything in China. They should know something about China before they invest there. If they have the same convictions that I do then they should probably have a lot. If you asked me that question in 1909 about the U.S. stock market, I would have said to put 100% of your money in the U.S.

Might it make sense to have a greater weighting in a diversified mix of Chinese stocks than in U.S. stocks?

Well yes. Just as in 1909, if you were German or Chinese, you should have had the largest percentage of your money in the United States. The idea of investing is to make money, not to have some sort of political agenda.

That being said, you currently think Chinese stocks are bid-up now, so you're not buying at these levels. So what have you been buying lately?

I have been buying commodities through the Rogers commodity indexes I developed because my lawyer won't let me buy individual commodities. I recently bought the all four Rogers indexes, the Elements Rogers International Commodities Index (ticker:RJI) as well as the three specialty indexes, the International Metals (RJZ), the International Energy (RJN), and the International Agriculture (RJA.)

That's how I invest in commodities and that's what I bought last week. I have been buying these shares since last fall and up to last week.

Though you got out of emerging markets last year before they fell hard, you seemed be caught by surprise by the fall-off in commodity prices last year. Is that right?

Yes, I was surprised. I did not expect commodities to go down that much and in retrospect it was a period of forced liquidation for many (professional) investors. You know AIG went bankrupt, which was huge in commodities. Lehman Brothers was big in commodities.

But at least I was shorting the investment banks at the time and other financials such as Citigroup and Fannie Mae. So I was hedged by being long commodities and short the other things such as financials and as you know most of them were down from 80% to 100%, so I more than made up on my shorts than I lost on my longs.

So thank God for (the stock decline in) Citigroup and thank God (for the decline) in Fannie Mae.

Now despite the recent stock-market rally that started in March, many U.S. stocks are trading well off their 2007 highs. How come you see no value to this market?

I am not buying U.S. companies mainly because I think we may have seen a bottom but I don't think we have seen the bottom. I am skeptical about the rally, the world economy for the next year or two or three. But if stocks go down, I can make money with commodities. In the 1970s, commodities went through the roof even though stocks were a disaster. In the 1930s, commodities rallied first and went up the most long before stocks pulled it together.

Can you summarize the reasons for your bullishness about commodities?

It depends on the supply and demand. And we have had a dearth of supply. Nobody has invested in productive capacity for 25 or 30 years now. The inventories of food are the lowest they have been in 50 years and you have a shortage of farmers even right now because most farmers are old men because it has been such a horrible business for 30 years.

And as for metals, nobody can get a loan to open a mine as you know. Who is going to give you money to open a zinc mine? It takes at least 10 years to open a mine so it's going to be 15 or 20 years before we see new mines come on. Nobody has been opening mines for 30 years and they are not going to.

And in the meantime reserves are declining. As for oil, the International Energy Agency came out recently with a study showing that oil reserves worldwide were declining at the rate of 6% or 7% a year.

That does not mean that if suddenly the U.S. goes bankrupt that everything won't collapse in price. But I would rather be in commodities because it's the only thing I know where the fundamentals are improving.

They are not improving for Citibank or General Motors but the supply situation in commodities is such that when demand comes back, then commodities are going to be the best place to be in my view.

What do you think of bonds?

I am anticipating shorting bonds, the U.S. long bond. It's about the only real bubble around that I can see right now -- other than the U.S. dollar. I am not shorting bonds at this moment because I've shorted plenty of bubbles in my day, and I have learned that you better wait because they go up higher than any rational person can anticipate. But my plan is to short the long bond in the U.S. sometime in the foreseeable future.

I've read that you think the penchant of the last two presidential administrations for bailing out failing U.S. companies is a big mistake and will contribute to prolonging this recession. You argue that it's best to let these companies all go bankrupt. How bad can the economy get?

Yes, politicians are making mistakes. In Japan, the problem has lasted for 19 years. I hope that it doesn't last 19 years in the U.S. The approach that works is to let them (U.S. banks and automakers) collapse and clean out the system.

The idea that phony accounting is the solution (through changes in mark-to-market rules) is ludicrous. And the idea that a debt problem and an excessive spending problem can be cured with more debt and more spending is ludicrous.

It's laughable on its face, but politicians think they've got to do something. Unfortunately, they are doing the wrong things and they are going to make it worse.

Thanks for your time.

Source.

Lee Neibart is the 58 year old CEO of real estate investment firm AREA Property Partners. The New York Observer sat down with Mr. Neibart to discuss the current commerical real estate environment. Mr. Neibart believes that multifamily is the best business to be in at the moment.

Question: One of the biggest things bandied about right now is that there’s capital on the sidelines, waiting to invest. Is that true?

Mr. Neibart: There certainly is capital on the sidelines. We have capital on the sidelines. The interesting question is how much capital really is there on the sidelines because everything’s measured against the liquidity of these investors. Some have lots of liquidity when the stock market’s 14,000; some have less liquidity when the stock market’s 7,000.

So there’s no real measure of the amount of liquidity on the sidelines. But there certainly is a lot; my guess is, it’s not as much as people think it is.

Why do they think it’s out there, then?

Because you hear big numbers raised. You hear that this fund raised that amount of money and this fund raised that amount of money. But if you really do the hard work, and add up the total amount of the actual commitment sizes, it’s probably not the range that people think it is.

When does the capital dive in? A lot of people say 2009’s a write-off.

The difference in this market from the previous down market is people are starting to question tenants. Before, it was an issue of mortgages coming due; in the early 1990s, they were rolled over and extended, but they were backed by very good and solid tenants.

And the problems that are occurring now with tenants such as AIG and Citibank, and the health and welfare of these tenants, against the continued bankruptcy of some retailers, are some of the major reasons why the capital is on the sidelines. People just have to see stability in tenants’ ability to make their rent payments.

That might be a long while.

That may be a long while, but there are lots of examples of people who dove in in 2008, when the prices were 20 percent lower than they were in 2006; and they, in fact, made a mistake by doing so because those prices have fallen further.

What kinds of investors are on the sidelines?

It runs the [gamut] from pension funds and sovereign wealth funds to private-equity funds and private investors. No one wants to dive in unless they can start to understand what backs the cash flow or the rents that they’re receiving in these buildings. And those diagnostics are going and analyzing and understanding [tenants’] ability to pay rents. That’s what’s going on now.

Your firm was involved in the development of this building, Time Warner Center.

We were the co-developer with Related.

Could a building of this size and grandeur and location happen today?

No. Projects like this are definitely on the shelf, I would guess, at least for another five years and maybe even longer.

What sorts of conditions would need to arise to allow them to happen?

Mixed-use projects like this, you’d have to be able to sell condominiums that exceeded the cost of building them. We were lucky enough to have Time Warner as our anchor; so you’d have to find a major user like that who, in fact, needed 900,000 or a million square feet of space. And, in fact, the quality of the retail tenants has to duplicate itself, and be available to expand into other mixed-use projects like this.

What about commercial development in general?

Very, very few commercial developments are happening. You see the postponement of major projects in midtown Manhattan, and I would expect those to continue to be postponed. No one will be able to get what they call a ‘spec loan’ or a ‘spec construction loan’ without some type of pre-leasing. Even today, having a building 50 percent pre-leased to a major tenant may not be able to get you the financing to build the building.

What about the CMBS markets? What opens them up?

I think what opens them up is basically that the buyers of these securities feel comfortable that they are investing in monies that have the proper loan-to-value ratio. No one’s going to jump in if there’s this continued uncertainty.

Should the ratings agencies be trusted when it comes to these securities?

I think that, as part of the total re-analyzing of the entire CMBS process, all aspects of this will be reexamined.

How long will that take? I guess I’m asking about a sort of return to normalcy.

I think the return to normalcy and the absence of exotic and different types of securities, I think we’ve quickly reached that point. Investors, lenders will go back to the way they used to do business in terms of lower leverage and more coverage on the loans, and it’ll be just a return to safety across the board.

You’ve been around for a while. How would you compare the boom market to previous eras?

This was, by far, the craziest three- to four-year period that I’ve ever seen. I started in 1974—we never saw cap rates reach these low levels of rates of return; we never saw situations where the rates of return were less than the interest costs on the mortgage. So, sometimes you have to be careful what you wish for because what we created was something that was unrealistic, not sustainable, and, in fact, has caused great pain.

What’s AREA working on right now?

AREA is working on about four different types of funds. We’ve raised a new opportunity fund which will be investing in distressed assets, distressed loans; so we’re actively working on that in the U.S. We also have a value-added fund that works on properties that are half-leased and in need of repositioning. We have an urban fund which works on rental apartments in major cities, improving them for renters. And we also have a major European fund that is involved with opportunistic and with value-added investing.

And what’s your general opinion of the federal stimulus and its effects on commercial investment?

I haven’t seen any real evidence of there being any loosening up of credit for lending institutions to lend money for commercial real estate. We’ve not seen it.

Wasn’t that supposed to have happened as part of it?

You would hope so.

Do you expect it to happen?

I would expect that it may happen, and it’s going to happen much slower than we think; because even the size of the stimulus, given the amount of mortgages out there, can only do so much.

You went to the University of Wisconsin, correct?

I did.

So did my dentist. And he was saying to me the other week that what’s going to happen is stuff is going to cost what it’s supposed to cost. Do you think, during the boom, certain commercial assets were just simply inflated? If so, what caused that? And will the assets’ prices come down more to in line with the market?

The assets will certainly come back to a much lower level, and I think a lot of that will strictly be a reflection of what tenants can pay. So, law firms, accounting firms, public-relations firms, major corporations, banks will only be able to afford a certain amount of rent. That will then dictate the value of the building. If, in fact, the rents get too high, they’ll move out.

What is the most desirable commercial real estate investment right now?

At the risk of my competitors hearing this—they know it already—we feel the multifamily is the best business now to be in; because the values have come down and they’re still very well leased. So, on a risk-adjusted basis, we think multifamily represents the best bet today.

Source.

FT: Thank you for doing the interview Mr President.

Obama: My pleasure, I read the Financial Times before other people read the Financial Times. Now it’s trendy and everybody carries around a Financial Times.

FT: Let’s talk about the G-20. What will be your benchmarks for success?

Obama: The most important task for all of us is to deliver a strong message of unity in the face of crisis. There’s some constituent parts to that. Number one, all the participating countries recognise that in the face a severe global contraction we have to each take steps to promote economic growth and trade; that means a robust approach to stimulus, fighting off protectionism.

Next, we have to make sure that we are all taking serious steps to deal with the problems in the banking sector and the financial markets and that means having a series of steps to deal with toxic assets and to ensure adequate capital in the banking sector.

Third, a regulatory reform agenda that prevents these kinds of systemic risks from occurring again and that requires each country to take initiative but it also requires coordination across borders because we have a global, we have global capital markets, and that will include a wide range of steps, additional monitoring authority coordination of supervisors and various countries dealing with offshore tax havens. Making sure that…

FT: Is that a problem? Offshore tax havens.

Obama: Well, its something that is going to be discussed. I know that in my discussion I think there is a concern that we don’t want people to be able to game the system or circumvent regulated capital markets and making sure our regulations are targeting not just banks but any institution that could pose a potential systemic risk to the system.

A final area of concerted action involves international financial institutions and their capacity to assist emerging markets in developing countries at a time when those markets could be under even more severe strain then some of the more wealthy nations and I think making sure that institutions like the IMF have the resources to provide such assistance that world food supplies are not imperilled as a consequence of the break down in global trade, those are all issues that I think have to be addressed.

Now, I’m confident based on conversations that I have this week with Angela Merkel, Sarkozy, as well as with Kevin Rudd as well as conversations that I have had previously with Gordon Brown and others, that there is already a rough consensus there that by the time we arrive in London we will have taken, we will have made significant progress in moving in the right direction.

FT: Let’s just talk about the stimulus for a moment. At the moment there has been a 1.8 per cent GDP boost in 2009 by the G20 nations. There are concerns among economists that you need a sustainable stimulus and therefore 2010 is key. Will you get secure commitments from say, the Europeans, for action if necessary in 2010?

Obama: Two points I want to make on this, Number one: The press has tended to frame this as an “either or approach”. There are some G20 participants that are arguing fiercely for stimulus, others for regulation. What I have consistently argued is that what is needed is a “both and approach”.

We need stimulus and we need regulation. We need to deal with the problems right in front of us and we also need to make sure we’re taking steps to prevent these types of breakdowns from happening again.

With respect to the stimulus, there is going to be an accord that G20 countries will do what is necessary to promote growth and trade. I think there is a legitimate concern that, would most countries already having initiated significant stimulus packages that we need to see how they work.

Obviously I admire economists. I have a bunch of them on my staff. But to start making a whole host of plans about next year, without having better information on how the current stimulus efforts are working, is something that I think is of concern.

So what we are going to see is what the United States has led on this. We have been very aggressive in terms of our recovery package. The way our recovery package is structured, money is going out both in 2009 and 2010.

But each country has its own constraints, its own political rhythms and what we want to just make sure is that everybody is doing something, everybody recognises the need to make progress on this front and that we are prepared to step into the breech should current efforts prove to be inadequate.

FT: I mean that is really the great challenge, in managing this crisis - bridging the gap between what is economically absolutely necessary and what is politically possible. How do you bridge that?

Obama: That’s one gap. Then there’s a gap in ideas about how to approach a crisis like this, especially among economists - although on the issue of the stimulus there seems to be much broader consensus among both conservative and liberal economists that stimulus is appropriate.

You know, the financial crisis hit the United States first; it is now being experienced around the world. Not surprisingly we took some very aggressive action earlier than some other countries because its impact had been felt most immediately on Wall Street.

As other countries start experiencing these drastic declines in GDP and in their exports I think that the sense of urgency has grown and you are going to start seeing a convergence.

In all countries there is an understandable tension between the steps that are needed to kick start the economy and the fact that many of these steps are very expensive and tax payers have a healthy scepticism about spending too much of their money, particularly when it is perceived that some of the money is being spent not on them but on others who they perceive may have helped precipitate the crisis.

So that is always going to be a challenge and what’s also difficult is the fact that the policies we initiate all take time to take effect and by its very nature politics looks for more instantaneous gratification.

But I am confident that the American people, and I think people around the world, are looking to its leaders to lead and that some of the steps we have already taken are starting to bear fruit. We’re seeing glimmers of stabilisation in the economies and we haven’t yet seen…

FT: Glimmers of stabilisation?

Obama: Here in the United States for example, you’re starting to see pockets of stabilisation in the housing market. Our housing plan has led to the lowest interest rates, mortgage rates in a very long time and you are starting to see a huge number of refinancing in the banking sector.

In certain select markets, like the market for auto loans or the market for student loans, Secretary Tim Geithner’s efforts to provide a market for asset-backed securities has helped and so we still have a long way to go, but I am confident that if we are persistent and we don’t approach this with a thought that there is a silver bullet out there but instead are willing to try a range of methods to deliver on the economic growth in jobs that we will get out of this current crisis.

FT: You mentioned the risks and dangers of protectionism. 73 separate measures have been identified by the World Bank since the last G20 summit so what again in practical terms can your administration do at the G20 to stop this - and I’m thinking to whether there are real risks that people worry in Europe a lot about what is going on, on Capitol Hill, with “Buy American” provisions.

Obama: Well first of all I think it’s important to note that here in the United States, despite some protectionist rhetoric and very real economic frustration growing out of the collapse of the financial markets and the huge rise in unemployment that the “Buy American” provision that was in the stimulus package was specifically written that had to be consistent with WTO. That the Mexican trucking provision is now subject to negotiations to ensure that we don’t see an escalating trade war.

I have sent a very clear signal that now is not that time to offer hints of protectionism and I will continue to discourage efforts to close off the US market. I think that in a democracy, there are always going to be some loose ends out there.

That’s true here, that’s true around the world but overall I don’t think that we’ve seen a huge rush to protectionism that that isn’t the rhetoric that is emanating from the leaders that will be gathering in London.

And to the extent that the American people or Europeans or Asians, Africans, Latin Americans all feel confident that their leaders are doing everything that they can to encourage and promote economic [..] and that they have their populations interests at heart, I think we are going to be able to hold the line on any significant slippage.

FT: I wondered Mr President whether you’re concerned that, particularly following the AIG bonus controversy, there’s some danger that confidence that business has in the rule of law in the United States has been shaken and that could hinder some of these recovery measures?

Obama: I think it is a source of concern in some quarters. To the extent that the captains of industry recognise very legitimate frustrations that the American people feel when they read about huge bonuses going to members of firms that are receiving large tax payer bailouts.

I think they can take steps to lessen that danger and I met with some bankers today and it was a constructive conversation but one of the points that I made is that a time when everybody is needing to sacrifice there has to be a similar sense of sacrifice on the part of those various sectors of the economy that helped to precipitate this crisis and to the extent that they’re showing restraint that compensation packages are structured so that there is some deferral until money is returned to tax payers and the economy recovers that will be good for everybody. That will put [...] in a stronger position to help them.

But you know, keep in mind that although there are going to be, I think, emotional reactions to and legitimate grievances around some of these issues, the United States has been the world’s most successful economy precisely because of a long standing respect for legal contracts and orderly transparent and open market operations and that’s not going to change.

FT: Mr President, given the rising tendency to populism on Capitol Hill and elsewhere, do you feel confident that at a time like this you can go to Congress and ask for the kind of backing of capitalisation that most economists say will be required in the near future?

Obama: I think it is very important for us to show that the money that has already been authorised is being well spent. That it is helping to result in loans going to small business and large business that are in turn investing and creating jobs. If voters perceive that it’s a one way street that we are just pouring more and more money into institutions and seeing no return other than avoiding catastrophe then it’s harder to make an argument for further intervention.

If on the other hand people start saying that they can refinance their house, and their child can get a student loan and that small business is able to retain its credit line, so that there is a tangible and meaningful result from our measures, then I think we can win back the confidence of the American public.

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We the people got what we wanted. Most of the top executives at AIG’s financial products arm have agreed to pay back their bonuses. So, too, have many of the derivative business’ rank and file employees. So, that’s settled then, right? Not so fast. There may still be a consequence of the AIG clawback.

Staffers at the AIG black-box operation whose massive wagers in the credit default swaps market necessitated a $170bn US government lifeline are leaving in droves. Many are quitting at the group’s Wilton, Connecticut office, including one whose letter of resignation to chief executive Ed Liddy made the New York Times op-ed page.

In London, where the bulk of the CDS bets were put on the books, at least two top dogs running Banque AIG left Wednesday. And insiders at AIG are bracing for resignations en masse, some even speculate the entire division’s employees in London will walk. A spokesman declined to comment.

Who cares, one might ask. These are the villains that nearly put the global financial system in the junkyard and then had the gall to proceed with paying themselves millions of dollars in bonuses. Even erstwhile compatriots on Wall Street and in the City share sympathies with the torch and pitchfork brigade.

After all, if it hadn’t been for the $165m that AIG was contractually obligated to pay the derivatives folks two weeks ago, Congress wouldn’t have passed a law taxing bonuses at big recipients of government bailout money by 90%.  So news that the AIG bankers are handing back a chunk of money takes the pressure off everyone.

But the story is not over. While some of the $165m may boomerang back to the taxpayer, what about the $170bn the government has pumped into AIG? Retrieving this will depend on how well AIG can unwind the remaining $1.6 trillion in trades to which the financial products division committed.

These aren’t simple IOUs. Some have durations of up to 90 years. They encompass many geographies, jurisdictions and asset classes. Many have models attached that were engineered in computer programming languages that are no longer even taught in universities. This is going to be a big, complicated task.

Of course there must be lots of unemployed bankers and traders willing to replace the fleeing bonus-takers of AIG. Perhaps, but the perquisites aren’t compelling: a low base salary and no bonus. Meantime, incredible public scrutiny has unfairly cast the image of AIG employees somewhere between that of a child molester and a journalist.

And the career path for those who agree to take a chisel to the derivatives book? Well, spend a few years winding down the portfolio and if you’re lucky you get to be the last guy to turn out the lights. There is, in short, no career upside and no money in this trade.

Outrage has clawed back a few million dollars in less than two weeks. But taxpayers better hope it has not come at a far greater expense in the long run.

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From Karl Rove, former Senior Advisor to President George W. Bush

Something powerful is stirring in the land, and it may not be good news for President Barack Obama, his agenda or the Democratic Party. Mr. Obama said Tuesday night his budget moves America "from an era of borrow and spend" to "save and invest." But people are realizing he would add $9.3 trillion to the national debt, doubling it in six years and nearly tripling it in 10 years, according to the Congressional Budget Office (CBO). How can that be "save and invest"?

In his inaugural address, Mr. Obama told us, "The stale political arguments that have consumed us for so long no longer apply." He wants to turn to new issues of education, health care and green jobs, which he plugged at every opportunity in Tuesday's press conference.

Suddenly, though, it doesn't seem like a time of new politics and new concerns. Many Americans are anxious -- and in some cases angry -- about a set of old issues: deficits, taxes and the national debt. Mr. Obama's radical budget, his administration's slapdash operating manner, and events such as the AIG bonuses have revived animosity over government's size and cost.

In response, tea parties are sprouting up, and opposition is growing to more bailouts, more spending, higher taxes and larger deficits, even among Congressional Democrats. Last fiscal year, the deficit was $459 billion. For this fiscal year, it was $569 billion when Mr. Obama took office. Under his proposals, another $1.276 trillion will be added to the deficit this year, for a total of $1.845 trillion.

The CBO says deficits will fall for three years to $658 billion, still nearly 50% larger than any past deficit. After that, deficits go back up every year, reaching the trillion-dollar a year mark again in nine years. By 2019, the debt would reach 82.4% of GDP, a level not seen since 1947. With astonishing candor, even Peter Orszag, the president's budget director conceded these levels of deficits and debt are "unsustainable."

Federal spending will under Mr. Obama top $4 trillion this year. This translates into 28.5% of GDP -- a level exceeded only at the height of World War II. According to the president's plans, spending will thereafter slow for three years, but then grow faster than the economy for the next seven years and beyond.

Spending rises by $3.1 trillion from 2009-19, including $911 billion for legislation signed during his first two months in office, including the stimulus bill and the expansion of the State Children's Health Insurance Program (and not including interest on the mushrooming debt). Mr. Obama is violating every tenet of his promise "to spend wisely, reform bad habits, and do our business in the light of day."

Americans are also worried about Mr. Obama's plans for $1.9 trillion more in taxes. These tax hikes won't just affect the "rich," as he claims. His cap-and-trade carbon tax will hit everyone who consumes energy -- that is, every American. Taxes on the top 5% of filers will result in lost jobs and wages for small businesses and less charitable giving. The administration claims higher taxes are required for deficit reduction. But its spending increases are half again as large as its tax hikes.

Nothing has deterred the administration from pursuing its staggeringly expensive agenda. Mr. Obama brushed off any concerns Tuesday night. He is quite openly using the economic crisis to launch a massive, permanent expansion of government financed by ever-more borrowing and ever-higher taxes. This may mean that his goal is to cause taxes to rise to European levels, transforming America into a European-style social democracy.

The dynamic he has set in motion could spur the emergence of strong competitors to Mr. Obama in 2012 who take a strong, principled stand against record-setting deficits, debt and taxes. It may also strengthen Republican chances in next year's midterm elections.

Democrats should, for example, be troubled by a new National Public Radio poll showing Republicans tied or ahead in generic matchups for Congress. And while the midterms are 20 months off, Republican gubernatorial hopefuls in Virginia (Attorney General Bob McDonnell) and New Jersey (former U.S. Attorney Chris Christie) are ahead in two states Barack Obama carried last year that vote this fall.

Tuesday night's news conference showed a fluid, self-assured president -- but one who seems to think that repeating a false argument will make it true. The man who promised to end "finger-pointing" has developed the habit of blaming everyone who came before him. Invoking the language of fiscal responsibility, he is engineering prosperity-killing deficits and bankrupting spending. Mr. Obama has put front and center a set of issues -- spending and taxation -- that brought Republicans to power in the past and may bring them back again. It looks as if we may be heading back to the future.

Mr. Rove is the former senior adviser and deputy chief of staff to President George W. Bush. Karl writes a weekly op-ed for The Wall Street Journal, is a Newsweek columnist and is now writing a book to be published by Simon & Schuster. Visit Mr. Rove on the web at Rove.com.

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From Henry Paulson, former Secretary of the US Treasury and currently distinguished visiting scholar at SAIS.

In the midst of the market turmoil, the pressing priority for US and global policymakers is to repair the financial system and restore the economy. Just as important, however, will be addressing the serious flaws exposed by this crisis.

This process of reflection and reform will be critical to restoring confidence and enabling market-based capitalism to rebuild our economies.

We must recognise the real possibility that because the crisis is not behind us, there may be lessons to learn and problems to address that are not now obvious. Yet many lessons are obvious and I take confidence from the commitment of world leaders – in the US, Europe, China and elsewhere – to pursue comprehensive regulatory reform and co-ordinate internationally.

First, this will be a big, multi-year undertaking. The crisis has exposed serious flaws in many aspects of our financial system. There will be proposals for more effective regulations in areas ranging from over-the-counter derivatives and short selling, to the practices of financial institutions, investors, mortgage originators and credit rating agencies.

We will need to reflect on the long-held premise that sophisticated investors have the wherewithal to look out for themselves and require minimal, if any, supervision. In these areas and others, regulations must be crafted to foster market stability while maintaining the fundamental tenet of capitalism: if investors are to reap the rewards of taking risks they must also bear the negative results of their risk-taking.

Yet updating our regulations and market practices will not be enough. We must also fundamentally reform and modernise our regulatory architecture and authorities.

While regulators have co-operated in addressing this turmoil, it is clear that their overlapping jurisdictions, gaps in jurisdictions and authorities, uneven capabilities and competition among themselves created the environment in which excesses throughout the markets could thrive.

Consequently, to focus only on new regulation would fall short: we must also modernise the regulatory system and authorities in the US.

This is not a new issue, but it is a difficult one. If we search for something positive in the carnage created by this financial crisis, it may be that it will provide the impetus for doing what many, including myself, have repeatedly called for: real reform of our regulatory architecture.

In the US we have a patchwork of financial regulatory agencies. Our agencies reside at both federal and state level. A company’s regulator is determined largely by its business form. Thus two financial firms providing virtually identical products with similar economic attributes may be regulated quite differently.

No one would ever design a system like this. It has evolved in an accretive way, without any real thought to long-term goals or objectives. It allows and promotes regulatory arbitrage.

This system allowed unregulated state organisations and non-bank affiliates of banks and thrifts to originate thousands of risky mortgages and it allowed AIG to build a huge and essentially unregulated hedge fund on top of tightly regulated insurance companies.

Business models, financial products and markets will continually evolve. That is the nature of a dynamic market. We must have a regulatory structure that recognises that dynamism and adjusts to it. Fortunately, we are not starting this process of reflection and reform in the midst of crisis.

In March 2008, after conducting a year-long process of study, I put forward a series of comprehensive recommendations to modernise our regulatory architecture in the Treasury’s Blueprint for a Modern Financial Regulatory Framework. The blueprint identified an optimal structure that was not designed to be accomplished overnight.

The ideal regulatory structure would reflect the reasons we regulate and would recognise that the financial system has changed dramatically since our regulatory architecture was designed.

Last March the Treasury proposed a system of three primary federal regulators: one charged with maintaining market stability across the entire financial sector, one for supervising the soundness of those institutions with explicit government support and one responsible for protecting consumers and investors.

Our proposed structure recognised that there would sometimes be a need for the Federal Reserve to provide liquidity support to institutions that it did not regulate historically. This would be a drastic realignment and simplification of regulatory agencies – in order to clarify responsibilities, provide powers commensurate with those responsibilities and improve accountability.

A regulatory structure organised by objective is far more likely to withstand the test of time. In an objectives-based model no business can change regulator simply by changing its form.

The dedicated business conduct regulator would be responsible for vigorously protecting consumers and investors, through its regulation of disclosures, business practices, chartering and licensing of certain types of financial institutions and rigorous enforcement programmes.

Consumers and investors would benefit from greater consistency across product lines and centralised accountability so that no product or service fell through the cracks. Mortgages are an example of a consumer financial product that has suffered from uneven and inadequate treatment in our current regulatory and enforcement regime.

A single safety and soundness regulator would supervise all institutions that are ultimately backed by taxpayer-funded guarantees and other forms of government support. It would end the division of such regulation among several regulators, which promotes ­“charter-shopping” and a race to the bottom. It would mean that businesses would compete on an economic basis, not on the basis of their regulators.

Finally, the crisis has made abundantly clear that our financial system would benefit from a regulator whose focus is on risks across the financial system. While the Fed is assumed to have this role, it does not have the mandate or powers to carry it out effectively. There is already growing support for the blueprint’s recommendation that Congress explicitly give this responsibility to the Fed, and provide it with the tools to meet that mandate.

It would require the Fed to have access to information from a broader set of financial organisations, including hedge funds and systemically important payment systems. This authority should also have the power to intervene if it concluded that the financial system was at risk. Because the breadth of authority provided must be great, the standard for using such authority, to protect the system as a whole, should be high.

Dissemination of information by this regulator should also help maintain market discipline, a concept that is still important. While it is true that both our regulators and market discipline failed in curtailing the run-up to this crisis, we are witnessing a strong dosage of market discipline today as investors require financial firms to deliver.

Another important reason to charter a market stability regulator is to provide an authority with the responsibility to examine and attempt to mitigate the too-big or too-interconnected-to-fail problem that we face.

Congress should create regulatory authorities capable of ensuring that any institution, no matter its size, can fail with minimal systemic impact. That requires authorities that balance market stability with private capitalism by imposing an orderly wind-down of the failing institution.

We have a process in place that gives the Federal Deposit Insurance Corporation ample and flexible authority to deal with a failing bank. After Bear Stearns’ collapse in March of last year, the Treasury and the Fed expressed concern that the government lacked this type of wind-down authority for a failing non-bank.

That concern became a reality when Lehman collapsed in September, and there was no authority at the Treasury or the Fed to save the institution, and no authority to manage the wind-down outside bankruptcy. A regulatory system that treats systemically important institutions differently solely because of their charter does not make sense in today’s globally interconnected markets.

Any rewrite of financial regulatory authorities must include the explicit federal authority to intervene and wind down a failing non-bank in an orderly manner.

Defining the proper wind-down authorities and their scope will require thoughtful analysis. Necessary authorities include the power in exigent circumstances, to guarantee liabilities, provide loans and take other stabilising measures. But the circumstances that would trigger these authorities must be narrowly defined, to minimise moral hazard and preserve incentives for proper risk management.

Creating a fundamentally different regulatory system is complex and will take months, if not years. But policymakers can achieve significant near-term regulatory reforms that represent progress towards the ideal.

These include giving the Fed expanded powers to regulate market stability, combining the Office of Thrift Supervision and the Office of the Comptroller of the Currency to strengthen regulation by reducing duplication, centralising the scrutiny of mortgage origination, creating an optional federal insurance charter, beginning the process of integrating the Securities and Exchange Commission and Commodity Futures Trading Commission and continuing to improve arrangements for clearing and settling over-the-counter derivatives, including development of well regulated and prudently managed central clearing counterparties for OTC trades.

Wrenching as this period is, the cost to our nation will be even larger if we do not learn lessons from it and overhaul our regulatory system so federal regulators have clear missions, powers to execute them and accountability for carrying them out.

A new regulatory architecture accountable to investors, with flexibility to adapt to changing markets and clarity of responsibility to interact with international counterparts to forge a seamless global market infrastructure, would inspire the confidence for the financial system to create prosperity in all sectors once again.

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