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tv   U.S. House of Representatives  CSPAN  February 4, 2011 10:00am-1:00pm EST

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judy is an independent. caller: i have some information here based on the figures coming from the department of homeland security which reported in the year 2009, over 1 million green cards were issued to foreign nationals, allowing them to come into this country and work in this country. the top four recipients were mexico, china, the philippines, and india. is this currently going on? host: why is it a topic of interest for you in particular? caller: more people in this country are getting green cards and we have a lot of unemployed people. host: i do not the specific policy of those countries. we are out of time.
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let me tell you what is coming up next. we are going to go to capitol hill for a congressional oversight panel. you are seeing some live pictures. the topic at hand is commercial real-estate impact on banks' ability. among the testimony will be former senator ted kaufman, mark mcwatters, richard neiman, damon silvers, and a professor of economics at the university of kentucky, kenneth troske. that is the panel. two panels of witnesses are coming before this panel today. thank you so much for being with us on this friday morning. we will be back tomorrow morning at 7:00 a.m. eastern time. on sunday, a special focus on
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the legacy of ronald reagan on the centennial of his birth. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2011] >> good morning. i am ted kaufman, the chairman of the congressional oversight panel. we welcome our witnesses and
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audience this morning. the dow jones industrial average has exceeded its year-end peak in 2007. housing prices have begun to recover. private companies are slowly hiring again. we have a long way to go, as everyone knows. it is only fitting that the government set aside its authorities to stabilize our financial system. however, the threat to the banking system and the broader economy remained. our hearing this morning will explore one of those threats in detail. a commercial real-estate loans. commercial mortgages are exactly what they sound like.
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almost everyone that lives in an apartment, works and an office building, or shops at a mall has spent time in a building that owes its assistance to commercial mortgages. the monthly payments are to low- end to fully repay the loan it during that time. the entire remaining balance comes due in the borrower must take out a new loan. a commercial borrower must reapply for credit every few years. today's market where banks remain hesitant to lend and the values of properties have fallen, many borrowers will be turned down. loans that will come due for refinancing in the 200011, 2012, and 2013, and beyond. there is a lag treated but between the moment -- the fuse
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has been lit. no one knows how much damage will occur when it finally burns down. the congressional oversight panel has been closely monitoring the commercial real- estate market since its first hearing in may 2009. the panel issued a report in february 2010. after almost two years, the panel remains deeply concerned. just last month, the missed payment rate of commercial mortgage-backed securities reached an all-time high. over 9.3%. the commercial real-estate market encompasses $3.40 trillion in debt. commercial properties could face a wave of foreclosures. customers, businesses, and renters could face uncertainty and even in fiction. small banks could face insolvency as nearly 3000 banks nationwide are considered by regulators to have concentrations in commercial
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real estate. concerns about real-estate loomed a broader theme of our oversight worked, that even in a crisis, while authorities must deal with the short term, they must be vigilant to the longer term threats. if a small bank survives the financial crisis thanks to the tarp, then tarp support will have served only to postpone the inevitable. more than 500 small banks continue to hold tarp money. we are grateful this morning to be joined by two panels of expert witnesses to help us explore these concerns included regulators and bank analysts. we look forward to your testimony. >> thank you, senator kaufman.
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welcome to our distinguished witnesses. in order to suggest a solution to the challenges facing the market, it is critical that we thoughtfully identify the sources of the underlying difficulties. without a proper diagnosis, it is unlikely we will craft a remedy with adverse unintended consequences. broadly speaking, the crew interest rate is faced with an oversupply of over-leveraged facilities and an under supply of prospective tenants and purchasers. there has been a remarkable decline in demand for cre property. many purchasers have withdrawn from the market not simply because rates and prices are too high due to the excess debt load
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carried by many properties but because their business operations do not presently require additional facilities. over the past few years, while developers have constructed a new office buildings, hotels, retail facilities, and industrial properties, with an excess of cheap, short-term credit, the end users facilities have experienced the worst economic downturn in several generations. any positive solution that focuses only on the oversupply of the leverage of facilities to the exclusion of the economic difficulties facing the end users, it is less than likely to succeed. the challenges confronting the market are not entirely unique to the industry, but instead are indicative of the uncertainties manifested to about the economy. in order to address the
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oversupply, developers and their creditors are struggling to restructure and refinance their portfolio loans. creditors are acknowledging economic reality with perhaps the retention of an equity kicker right. lenders and borrowers are simply kicking the can down the road by refinancing credit on a short-term basis as to avoid loss of recognition and capital impairment for when there is adverse tax consequences. while each approach might offer assistance, neither addresses the underlying reality of too few tenants and purchasers of cre facilities. until large and small businesses hire new employees and expand their operations, it is doubtful that the market will
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sustain a meaningful recovery. as long as this is faced with the challenges are rising, it is less than likely that they will enthusiastically i assume the entrepreneurial risk necessary for expansion and a robust recovery of the market. it is fundamental to a knowledge of -- the american economy grows one job and one consumer purchase at a time. with the expanding array of rules, regulations, and taxes facing business people and consumers, we should not be surprised that businesses remained reluctant to hire new employees, consumers remain cautious about spending, and the market continues to struggle. the problems would be easier to address if they were solely based on the oversupply of over leveraged cre facilities.
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it in such an event, a combination of thoughtful, yet no doubt painful, restructurings and foreclosures would result in the material the leveraging and repricing of troubled properties. unfortunately, even those properties that are appropriately a leveraged and priced must also assimilate a drop in demand. although some progress has been made, the administration could further assist the recovery as well as a broader u.s. economy by sending a message to the private sector that it will not directly or indirectly raise taxes or increase the regulatory burden of participants. without such action, the
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recovery of the market will quite possibly proceed at a sluggish and costly based with further adverse consequences for those financial institutions and investors that hold loans and commercial mortgage-backed securities. thank you and i look forward to our discussion. >> thank you. >> thank you, mr. chairman. good morning. this is the third hearing we have conducted on the real- estate market with the troubled asset relief program. our earlier hearings look at this issue through the experience of the new york and atlanta metropolitan areas. this is the first hearing focused on the national picture. in our february 2010 report, this panel urged the treasury department and the bank regulators to closely monitor
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commercial real-estate markets out of concern that the rapid decline of this market could lead to problems for financial institutions with significant exposure to commercial real- estate loans and could affect the small banking sector. we noted that due to the shorter term of most commercial real- estate loans, the banking system would face rollover problems for more than $2 trillion worth of commercial real-estate loans between 2011 and 2017. loans whose collateral seems to fall when the loans come due. today's hearing is an opportunity for us to revisit the question of what is going to happen to smaller banks as loans become do and what impact these developments will have on efforts to revive commercial lending and on the degree of concentration in our banking system. we do this against a backdrop of smaller tarp-recipient banks.
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even when compared to non-tarp recipients of the same size and against a backdrop of the challenges that the treasury department faces in terms of constructing an exit from tarp for these smaller recipients of tarp assistants. this hearing is also an opportunity for us to look more broadly at the implications of the commercial real-estate market. several of our witnesses today have pointed out in the written testimony that commercial real- estate loans are concentrated in smaller banks and are not a problem that threatens the stability of this systemically significant institutions. we also have a substantial body of testimony that discusses the capacity of banks and other lenders to restructure commercial real-estate loans and the difference that capacity has made in terms of mitigating the
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impact of the dramatic fall of commercial real-estate the views. neither proposition is a great comfort to me, nor would i think would be a great comfort to the american public. every week, the fdic resolve's more failed small banks. those banks are shut down, stockholders wiped out, and in many cases, employees are laid off and communities are left without important institutions. all of those harmed by these actions know that if they had just been systemically significant, they might be well on their way to the enjoying the fruits of the recent boom in finance. consider the families facing the loss of their homes each month due to residential foreclosures
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in substantial part because of the lack of flexibility in the approach banks have taken. today, rather than dwell too long on these in justices that appear to be profound lost in the heart of our landscape, i would hope we can learn something practical from this hearing as to whether we still have cause to be concerned about rollover risk, and two, what we learned from the commercial real-estate experience? i look forward to hearing from our witnesses and i extend my thanks to all of you for helping us today. >> cantu. >> thank you, senator kaufman. i would like to start by thanking the witnesses. i appreciate you coming here to help us with our oversight responsibilities. in my opening comments, i want to touch on a topic, while not
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the proper subject of today's hearing, it is certainly related, the role of a regulatory oversight in the recent financial crisis. one common theme in the aftermath of the recent crisis has been that the crisis could have been prevented by more regulation. in our economic system, there are two sources of regulation. both forms of regulation have their strengths and weaknesses. in my opinion, many of the calls for increased regulation fail to recognize some of the weaknesses in this type of regulation. it is important to start off by recognizing regulators are human beings, not super heroes, and they respond to incentives like all of their normal human beings. government regulators have little incentive to closely monitor the behavior of companies to ensure they protect investors and the economy. in a well functioning market,
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shareholders have a great deal of incentives to monitor for behavior's since they do have skinned in the game. some regulators to an exemplary job, but there are others whose efforts will focus on implementing rules to maintain their positions. it is hard to know which is which before problems arise. as far as i know, no government regulator lost his or her job because the firm the regulated failed or received a bailout. many of the agencies that have received the most blame received additional authority in the recent legislation. it seems clear that regulators have little financial incentive to apply the procedures that will yield a maximum benefits, so we are forced to rely on personal motivations for doing the right thing. government regulators operate in a political process.
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shareholders and executives complain to their elected representatives about the burden of regulations. we have seen this process played out time and time again in a variety of settings. when companies are making large profits, it is unreasonable to expect government regulators to have the political will to pop the bubble. i am not saying the way the political process works is appropriate, just that this dynamic must be kept in mind when thinking about the effectiveness of new regulations. we have to recognize how executives and creditors respond to regulation. all businesses aim to provide a product that their customers demand. customers continue to demand many of the financial products at the heart of the financial crisis such as debt obligations and other complicated derivatives. giving new government regulation will likely push firms to
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develop more complicated and difficult to regulate clinic for products. in addition, with an increase in government regulation, it will decrease shareholders' efforts at monitoring managers and allow their oversight -- given that regulation pushes companies to reduce the incentives for shareholders and creditors, government regulation likely lead to a world where there are fewer crises, but those that are occurring are much larger and much more destabilizing. is this a trade-off we want to make? it seems to me that a much simpler and more efficient solution would be set to simply eliminate the guarantee which
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would provide creditors with the incentives to monitor the behaviors of firms. claims that the lack of regulation led to the recent financial crisis are akin to claims that someone got sick because they did not take enough medication. some medicine may prevent you from getting sick but the correct medication is a complex function of health, behavior, and the disease ultimately encountered, so it is virtually impossible to design a regime that will prevent someone from ever getting sick. he did balanced diet, exercise on a regular basis, do not smoke, avoid drinking to excess -- designed to help build resistance to most common diseases. however, even following these rules, people still get sick. good regulation would follow a similar course.
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however, even the best government regulation will not prevent the occurrence of future financial crises. the best they can do is minimize the effects and make people aware of the risks so they can prepare. we need to keep this in mind when trying to design up to more regulation and planning for future crises. hopefully the testimony we here today will help us better understand the remaining problems in the market so political leaders can work towards more efficient regulation to ensure the stability of the financial sector. >> thank you. >> thank you. good morning. i want to thank our witnesses who are appearing today after hearing of the congressional oversight panel. the panel first export these issues are around commercial real-estate in our field hearings in new york city 2009
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and in atlanta in january of last year. in the time since then, there is reason to remain concerned about mounting pressure in the commercial real-estate sector. financial stability has been returning overall, but this nascent recovery is still vulnerable to shock. the concern is the credit risk embedded in commercial real- estate loans could provide such a trigger in the near term. it is estimated that hundreds of billions of dollars in commercial real-estate debt will be maturing in 2014. the prospects of refinancing are uncertain as the recession and high levels of unemployment continued to put downward pressure on property values. this could even jeopardize the viability of loans that were properly underwritten. these difficulties may weigh heavily on its midsized and community banks which are comparatively more concentrated in commercial real estate than
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larger institutions. but the future of commercial real-estate lending matters to more than just a subset of lenders and borrowers. commercial real-estate impacts every community on multiple levels, so understanding the sector is an important aspect of stabilizing our national economy. we are talking about the office buildings, shopping malls, and hotels that shelter jobs. mortgages that help businesses remain open are critical to economic recovery. commercial real-estate also includes a multi-family and affordable housing units, for apartment buildings in particular. there is a concern that conditions will deteriorate as the owners' cash flow is diverted to making debt payments. further, people confine themselves homeless because their landlords defaulted on the underlying commercial mortgage.
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workouts for distressed loans on properties should be restructured with community preservation of goals in mind. i will be exploring this connection between the well- being of our society and financial stability. there are many issues such as what steps are being taken to protect members, renters, and multi-family properties during a foreclosure. is a credit being artificially restricted? our banks adequately prepared for additional loan losses that may be coming? i look forward to the response on these issues and to hearing your innovative ideas on stabilizing commercial real estate. thank you again for joining us. >> i am pleased to welcome our first panel. we are joined by sandra thompson. patrick parkinson, director of
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the division of banking supervision and regulation for the federal reserve. and david wilson, deputy comptroller for credit and market risk, office of the comptroller o. your record will be printed in the official record. we will start with mr. -- which will start with ms. thompson. >> good morning. i appreciate the opportunity to testify on behalf of the fdic regarding the condition of the commercial real estate market and its relationship to the overall stability of the financial system. the events surrounding the recent and enterprises have taken a heavy toll on economic activity throughout our nation. the past three years have been difficult for many institutions focusing on cre lending. in 2009, there were 140 bank
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failures. last year, 157 banks failed. many of those failures were caused by losses on construction loans that were made during the boom years before the crisis. some banks continue to experience as elevated losses. distressed loan exposures take time to work out, and in some cases, require restructuring to establish a more realistic and sustainable repayment program. some loans may not be able to be modified and must be written off. this process of prompt loss recognition and restructuring, painful as it may be, is needed to lay the foundation of recovery in the market. at the same time, it must be recognized that many institutions with cre concentrations have weathered the crisis. as of the end of the year in
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2008, there were over 2200 institutions that had such concentrations and many continue to operate in a safe and sound manner. it is important to note that the capital level is relatively strong predictor of the almost 8000 insured institutions reporting as of the end of last september, some 96% are in the well-capitalized category. for banks with concentrations, 87% are well capitalized. the fdic and the other federal banking regulatory agencies have taken a number of steps to better understand the nature and extend of cre concentrations. the fdic has expanded the use of visitation at institutions with these concentrations. we have broadened our offside programs.
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we received more detailed information on a quarterly basis on owner-occupied exposures so we can better portfolios. the fdic is also joining with the other federal bank regulators in encouraging lenders to continue to make prudent loans and working with borrowers who are experiencing difficulties. also a number of institutions have reported poor results for the past several years, there are emerging signs of stabilization. year over year earnings have improved for five consecutive quarters through september 30, and loan loss provisions have declined. additionally, non-current loan balances have declined. there are other signs pointing to a slow stabilization in the residential and commercial property sector with improvement in prices and a vacancy rates.
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nonetheless, while there are signs of stabilization, the cre market is at distressed and it will take some time to work through these issues. all banks, community banks in particular, play a critical role in helping businesses fuel economic growth. we support their efforts to make good loans in this challenging environment. thank you and i will be pleased to answer any questions from the panel. >> think you for the chance -- thank you for the chance to discuss the overall stability of the financial system. the rate of deterioration in the market has leveled off, and there are some early signs of price stabilization. while the weakness and real- estate markets continues to be a drag on overall growth and the economy, cre-related issues present problems for the banking industry.
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losses associated with cre lending have been the dominant reason for the high number of bank failures since the beginning of 2008. losses for bank loans continue well past the trough of recession. we expect this pattern to continue. working to the large volume of loans will take time as banks go to the difficult process of workouts and restructurings. loan restructuring to reduce the losses of the banking system. a proper restructuring to reduce the damage done to businesses and the economy by limiting the forced liquidation of properties. while we expect significant ongoing problems, it appears that worst case scenarios are becoming increasingly unlikely. delegates the raids on construction development loans began to improve slightly --
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rates on construction development loans have begun to improve slightly. approximately one-third of loans are scheduled to mature over the next two years. this represents substantial risk as loans typically have large balloon payments. since the passage of the october 2009 guidance on prudent loan workout, banks have increased the level of restructuring. economic incentives to restructure or advance existing loans are advanced by the current interest rate environment. some banks are also beginning to see a pickup in demand for high- quality properties. since the beginning of 2008, the third quarter of 2010, commercial banks have incurred
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almost $80 billion of losses related to cre exposure. given past historical experience and the recent improvement witnessed in the broader economy, it is estimated that banks have taken roughly losses.0% of cre losses ultimately realized during this cycle will depend on macroeconomics and financial sectors. sensitivity of losses to those factors are why we continue to emphasize the importance of stress testing as a critical element of managing risks. progress on working through the overhang addressing the cre wil l take time. that loan loss reserves and capital reflect risk, that loans
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are modified in a safe and sound manner, and that loans continued to be made available to credit- worthy borrowers. the federal reserve will continue to work with lenders to make sure supervisors take a balanced approach to ensure safety and soundness. thank you. i look forward to your questions. >> thank you. >> [inaudible] i appreciate the opportunity to discuss the observations about the commercial real-estate market and its impact on national banks. the occ supervises about 1450 national banks. commercial real-estate lending is a prominent business line for many national banks.
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national banks hold approximately $735 billion in outstanding cre loans. and while there are signs the commercial real-estate market is beginning to stabilize, we are a long way from a full recovery. vacancy rates are starting to recover but remain high by historical standards. we expect them to remain elevated for at least the next 12 months. the rate of return demanded by investors has also shown recent signs of stabilization cap rates fell substantially from 2002 until 2007. then the increased markedly in 2008 and in 2009 as investors became more risk averse. cap rates have appeared to have
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stabilized but the spread being demanded relative to treasurys remain why. a key driver for property values and loan performance is not a net operating income or cash flows. overall, while we expect a rate of decline to lessen, only apartments are expected to show meaningful growth this year with other major market segment expected to turn positive in 2012. property prices have also shown recent signs of stabilization. the moody's index recorded an increase of 0.6% in november 2010 which was the third consecutive month of national price gains. while this trend is encouraging, we expect the prices to be on volatile until fundamentals improve consistently.
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the performance of loans within national banks mirror those in the broader market. while there are some signs of stabilization, non-performing loan levels remain elevated and continue to require significant attention by bank management and supervisors. the effect of commercial real- estate on individual national banks varies by size, location, and type of cre loan. because the charge operate for construction loans led performance problems in the sector, banks with heavier concentrations in this segment tended to experience losses at an earlier stage. performance in this segment is expected to improve more rapidly as the distressed construction loans diminish. conversely, banks whose lending is more focused on income- producing commercial mortgages or -- are continuing to experience higher rates.
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another factor for many banks is there cre concentrations. although concentrations is a percentage of capital have declined recently, there are still significant for many midsized and community banks. concentrations and workout continue to be areas of interest. our objectives are threefold. ensuring the banks adequately rate loans, that the work constructively with troubled borrowers, and they maintained adequate loan-loss reserves and capital. we are emphasizing the importance of stress testing and assessing whether additional supervisory policy or guidance may be needed for institutions to more effectively deal with the risks that cre concentrations can pose to the industry. in summary, there are modest
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signs of improvement, but the market still faces significant head winds. ultimately, stabilization of the market will require restoring an equilibrium and supply and demand that will hinge on the recovery of the overall economy. this process is not painless. we expect portfolios will continue to be a drag on some banks' performance. during this period of adjustment above the occ will continue to take a balanced and measured approach in its supervision. >> we have some questions. i want to start out by talking about small banks. i would like for each of you to comment on the stressed commercial real-estate market -- how much do you think that overhang is affecting the recovery? >> i think the overhang is impacting the recovery, but when we issue the guidance on the
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loan workout, we are starting to see a lot of restructuring. for the banks in our portfolio, they have a close and good relationship with their borrowers. we have about 4700 institutions. we have our people located in the communities. the bankers that service their portfolios have a high touch with their borrowers and they are familiar with the market. it would be a win-win for them to work out and restructure these loans. we have been encouraging them to do so and acknowledge when they cannot work and also they can take the losses right away. >> dr. parkinson? >> i think it is affecting the recovery. we have been emphasizing the importance of prudent workouts and certainly monitoring what the banks are doing in that area.
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even with affect a workout, many of them have larger volumes of assets that are extremely troubled. further losses are going to be recognized. in some cases, that is going to jeopardize their ability. i don't think at this stage there is much we can do about that other than to make sure they follow the work of guidance to medicate the damage. >> mr. wilson? >> yes, i have similar comments. and there is a number of severely distressed community banks that probably will not make it. there is no real silver bullet. the best we can do is make sure we are fair and consistent, and we are consistent with our workout guidance because in many cases that is the best for the bank, the customer, and the community. >> many times, we talk to
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borrowers who say the banks tell them they cannot lend the money or work it out because of the regulators. i have heard this time and time again. miss thompson, do you have some comments to address this complaint? the person that these borrowers are planning is not the banks. they blame it on the regulators. >> you are absolutely correct. we hear that all the time. we try to take a balanced approach to supervision. we want banks to make good come operative loans. we do not want them to kick the can further down the road. we think it is important that they have good underwriting standards. as long as a bank is making good loans, which are encouraging the practice for small business lending, residential cre.
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we all know what happens when a bad loan is made. >> dr. parkinson? >> we are certainly aware of these reports and we are taking a very careful look at what our examiners are doing to follow the guidance we have set out to take a balanced approach. we try to do that through guidance of examiners and training, working very carefully with the examination process, and reviewing the sample of an exam reports to see if there are any inconsistencies with the guidance. by and large, the examiners are appropriately considering the guidance.
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>> mr. wilson? >> equally, we agree with that. we do hear that a lot. we are very sensitive to it. when we try to solicit specific examples of a situation where we can follow up, many times, when we do get specific situations, we do believe our examiners are working appropriately, but lots of times it is more general that we cannot track it down. >> how many times do you think the bankers are blaming you for the fact that they do not want to make the loan anyway? but i will not ask the question. >> let me start at a 30,000-foot question. the last time we had a severe real-estate depression was 1989 through 1994. the answer was the resolution trust authority.
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rtc purchased a lot of loans and sold them at very cheap prices. it did lead to immediate process of discovery of what was the fair market value of those assets. given where we are today, is there a need for an rtc? miss thompson. >> [inaudible] i worked at the rtc. i think the industry and the regulators worked through this issue. i think we are seeing signs of stabilization. the cmbs market is coming back. we saw many transactions during the fourth quarter of last year. it seems like the work a process just needs to be given
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time to work itself through. i am not sure that entity is necessary at that -- at this point. >> thank you. >> the rtc was created to dispose of the troubled assets from banks. if the concern is about the overhang of troubled assets at banks, until they fail, i think if the notion was that we would create a government entity to buy troubled assets from commercial banks that were still sound, he would face the same issues they did in trying to get the original inception of the tarp program off the ground. how do you do that in such a way where you are not creating a government subsidy on not giving a fair price to the troubled institution? >> let me ask you this question. quasi-re any need for a cause
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tarp structure? it is not a technical lead. interest from it to the public, and as properties recover, disposes of the properties probably with investors granting black participation right to the government, so the government walks out whole. is there any need for something like that? >> i have not given as a proposal any careful thought, but i think the challenges would be many. where within the government would we have the capacity to manage, etc., etc.? i have not heard that proposal.
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>> what i am looking for is not necessarily the mechanics, but whether or not government intervention or taxpayer funds are needed to solve this problem. >> funds have been flowing back into real estate as of late. i think another point that all of us made was that ultimately the fate and value of these commercial real-estate properties are driven by developments in the broader economy. i think the best thing we can do is try to support the recovery monetarygh a prudent an fiscal policies. >> mr. wilson? >> i agree.
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i think there is a lot of money out there looking for the right price. there is a price discovery on some of the most troubled assets, but i think there are many cases where it makes more sense for the bank to hold on and work with the borrower if there is a viable source of repayment to repay the loan. i think we can probably work to the process as painful as it would be pretty quick miss thompson, did you have something else to add? >> i think you're referring to an equity trust transaction used for failed assets with the assets were sold into a trust. the government took a percentage share of both the downside in the upside. that seems to work well with assets from failed institutions. i am not sure if that is necessary now because the market
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is starting to open up and some of the problem banks are starting to raise capital. as i mentioned earlier, the cmbs market is starting to slowly come back. i think especially with that market, servicers have a lot more flexibility to work out the loans, as do banks that have commercial real estate in their portfolio. so i think the transaction itself has been done, and i think it is a good economic -- i think it is a good mechanism. >> my take away from this is that from the fdic, fed, and the occ perspective, there is not a clear need today for direct governmental intervention for taxpayer funds to solve this problem. thank you. >> thank you. >> thank you, mr. chairman.
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and i want to observe that our work as a panel is coming to an end. this is probably our second to last hearing. when of the great pleasures is to learn from such dedicated public servants as yourself. i think we discussed motivations, it is always apparent to me that people such as yourselves have had many opportunities to make money elsewhere. i know from each of you that you have spent long career serving the public, and the motivations in called are not dreamed of in the economist philosophy. now, from that high level to the more mundane, dr. parkinson, in york written testimony, you observe that commercial banks have been chopped off about $80 billion in commercial real- estate assets. do i take from your testimony
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that these charges-offs have been driven not by refinancing failures but by the failure of the borrowers to make the payments? it do i read that right? >> -- do i read that right? >> if they cannot meet the original terms of the loan, they are in trouble. i do not know. and i am guessing there is some of both and in many cases the fundamental problem is the lack of cash flow. that, in turn, would make it very difficult for them to make the balloon payment. the reason that the charge-off has occurred, it seems likely given the timing of the
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refinancing issues and the balloon payments, the reasons why these charged-offs have occurred is likely in the routine cash flows. >> i would agree with that because commercial banks, companies, and special servicers have a fair amount of ability to work with customers. if there is cash flow and the loan has matured, that is an issue, but a lot of times, they can work through those issues. >> mr. thompson, do you have anything to add to this? >> i think most of the charged- off has been in the -- >> i was going to get to that. >> the distinction -- you notice a significant differences -- >> what portion of the $80
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billion do you think are development loans and the like? >> probably 6 million -- 66% of charge-offs. >> this hearing has already been ranged widely, but i think our fundamental concern is that we have a $34 billion in tarp assets for banks mostly or almost entirely smaller banks. they are exposed to the commercial real-estate market. the question is what happens when the balloon payments come due. tell me if you disagree, but it seems like we have not gotten to the question yet, that the charge-offs we have seen are predominantly due to cash flow issues and in development loans, not in occupied properties. is that a fair summary of where we sit?
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>> i think that is fair. >> this is the third hearing. what happens when the balloon payments hit? you say there is a lot of flexibility here. let me ask you this. if i am a tarp recipient bank, and i come to you with a bunch of loans that come due, and the borrowers cannot make the payments and they have problems are refinancing because prices of property have fallen 40% -- i am a bank and i come to you and i would like to be able to roll over this loan or redo it even though the value of the property -- the collateral cannot support the loan under normal underwriting standards. what do you guys say? >> we are telling our examiners
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not to have banks classified loans because the collateral value has declined. you have a bar where they can make the repayment, i think that is the fundamental issue. >> this is a situation where the borrower cannot make a payment. they cannot make it. >> they may not be able to make that payment -- >> they are making their ongoing payment. >> if they are making their ongoing payments, there are flexibility is that the bank is allowed to provide them for those types of transactions. they can modify the loan, extend the loan, and we would focus on the borrower possibility to pay. but we would encourage a modification. >> if it was a film project, you would have no cash flow. it is a look -- if it was a
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failed project, you would have no cash flow. there is opportunity to resize the loan and bring additional equity to the table. there is the ability for the bank to charge it down but not off and restructure the loan. the lost continent is not as high with commercial mortgage at which we seek is as a bigger issue going forward. >> thank you. >> thank you. i would like to continue my line of questioning. this is a very complicated problem, knowing when you write a property down in an economy where prices are fluctuating greatly. are there general rules that you can provide us with when you think is appropriate for a bank to write down a property and when you leave it on the books
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as is? what is the cost of the benefits from taking either action? >> well, i think that a bar or's the ability to pay is a big factor -- i think that a borrower's ability to pay is a big factor. certainly, foreclosures need to take place, and write-downs need to take place. as banks to a hard look at the capacity -- i think we could likely restructure and modify a loan that would work for both the borrower and the bank. i do think that most institutions, especially the smaller institutions, hold these loans in portfolio and they are very much aware of the appraisals and values that are in their specific communities. i think these bankers have
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really good understanding of what they are supposed to do and when they are supposed to do it. we try not to be too prescriptive. if you cannot restructure the loan, write it off as soon as you possibly can. >> number one, i think you are right that it is a difficult question. the local bank probably has the best information to make a sensible adjustment. the borrower's ability to service at the restructure loan is a critical thing, or perhaps the bank asked to ask themselves how to maximize the value or do i leave in the hands of the original borrower? the answer of the question is going to depend on the assessment of the borrower.
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>> fundamentally, when we evaluate a loan, we look to cash sources first to repay the loan. as long as that is still intact, the value of the property is less important. the primary source of cash flow is not there or they are insufficient, then we have to look to the value of the property and say, that is sort of our benchmark for which you charged the loan down to. we would not do that if the source of the cash flow to pay the loan. >> i want to expand and something you hinted at that is a belated issue. one of the things we noted is the concentration of these cre
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loans. what is their comparative advantage in making these loans? there have been questions about whether these loans should be with concentrated in the small and medium-sized banks. give me an overall sense of how we got to this situation where these banks are holding the loans and what mr. infanta's in doing this? and what is the advantage in doing this? >> if i am a bar from outside the air, i will not have the -- if i am a borrower from outside the area, they have a competitive advantage compared to other potential lenders. the point that over the years, smaller institutions have become concentrated in cre because of
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technological changes, they no longer work the most efficient or effective lender. and some sense, their concentration in cre is to result of an adverse selection. so it is understandable why they have ended up where they are. it does pose a risk. one thing worth emphasizing is that lots of banks with cre concentrations are in deep trouble. lots of banks are managing those concentrations quite well. that comes down to the importance -- the percentage of their portfolio and their capabilities for managing that portfolio. our guidance has not been specified in terms of putting
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arbitrary limits on the concentration, but trying to encourage institutions to manage them effectively. >> my time is up. guest: dr>> dr. troske -- i thik cre is good in regulating -- looking back over bad practices over prior periods, assessing a bank's asset quality and its capital ratios. there's a growing consensus that in addition to that type of static assessment that there should be a four-looking approach to supervision. -- a forward-looking approach.
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you focused on stress testing by the regulator and also what you're expecting on the banks. when you look at the reforms, there are additional assessments going forward with a florid- looking approach, whether it be living wills. can you talk about your views on the lessons learned here, and how regulatory supervision has changed. and is a concept been grasping by regulators? >> yes. we do have a four-looking supervision program at the fdic -- we do have a forward-looking supervision program. we looked at institutions that have high concentrations of commercial real estate that had a volatile funding sources. we have put together a training program for all of our examiners
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that focuses on not just the financial condition of the institution but the practices of that institution. we are increasing our offsite surveillance for all institutions so that we know, especially those with cre concentration, what their financial condition is. we are concerned about interest rates. this is a low-interest rate environment. we want to stress testing so they can see where they will be if an adverse situation takes place. we are concerned about the health and safety and soundness of the financial sector. we have had a good response from our bankers with regard to this forward-looking provision approached. >> can you comment also in the cre context as to what is expected on institutions under
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different economic scenarios as well as utilizing statistical modelling for lost reserving? >> that is an important emphasis that we put out in 2006. it has been reinforced with respect to the larger institution and requires the board to conduct annual stress tests. it requires banks to conduct their own stress test. those debtor $10 billion -- on a semi-annual basis. and to post reports on that. where there is cre concentration, those stress testing will have to be an important part of that. the cre data collection project. we are collecting loan-level data on cre loans from the very largest cre lenders and that is
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being expanded. we'll have a better insight into the -- to understand how the values of the loans are being driven by the underlying economic variables. and to be able to figure out how to stress test the existing portfolio. that is an important, recent initiative among the three agencies. >> thank you. we have talked often about better performance data on the residential side. it sounds like it is just as important on the commercial side. which is like to comment on the expectations of what you would like to say to address some of the risks in going forward on the cre? >> stress testing is an area that focuses at all levels of banks. we would size our expectations to the size of the bank.
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we would size our expectations to the level of concentrations that those banks have. if you are a community bank without a concentration, we would expect a lower level. we are in the early stages of putting together additional guidance. we are working with the fed and the fdic on that. we are talking about additional tools that the special community banks can use. >> thank you. i want to follow-up on the concentration of commercial real estate. the effect is there is an overhang. the ability to carry out the other things that the bank does. do you think that affects their ability to make of the loans? >> for a small subset of banks, the one on the ftse problem loan
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list, that is a true concern. they are focused on working on commercial real estate. we have a large number of banks in all sizes where they are open for business as well as for other lending. i think the disconnect is more -- more of a pullback on the underwriting standards that got too liberal. and so it is a bit of a new world for borrowers. borrowers to qualify, we believe that there is plenty of credit available. >> dr. martinson -- dr. parkinson. >> i think where a bank has a cre concentration and it is a concentration of work -- of loans. those banks which then when you look at loan growth by the
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ratings of the banks, the banks could do lowest ratings are contracting loans and at a much more rapid pace and are recovering more slowly in terms of lending. to the extent the commercial role is not managed well, that does have an adverse affect on people to rely upon that bank. >> miss thompson. >> i agree with my colleagues. the level of lending for the larger institutions decrease while the lending for the smaller community banks that do have the significant concentrations did increase. >> would there be a significant shot on the real estate market? -- myill defer that's answer to my colleague to at the federal reserve.
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>> i am more interested if that happens for the banks you are looking at, would that be a significant problem for those banks. if interest rates start going up. >> this is a good environment for restructuring. a good environment for rhee financing and modifications and sales. -- fort re-financing -- for re- financing. >> why interest rates are rising and the most likely they would be rising would be the economy was recovering and the fed was feeling comfortable raising its target rate. i would be willing to accept the risk and the adverse affects of the rising interest rates in that context of economic growth. >> mr. wilson. >> i agree with that.
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the disaster would be if rates went up and the economy does not improve. i am concurrent with that. when rates go up, in the economy is getting better. hopefully there is more capacity. >> you mentioned stress tests. all of dimensions stress tests. when stress tests come along, do you think they should concentrate -- to determine the stress tests on a financial institution? >> i think the lessons we just went through of the late 1980's and early 1990's should be applied to commercial real estate portfolios. it has been pointed out that some banks do come through even these severe downturns and cannot the other side even though they have larger concentrations. what we need to do is understand better and size those. it seems that construction and
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development, we need to pay more attention to those the maybe the permit commercial mortgage. but even that, at some level, a concentration is just too much. if you have a distressed test, you can show that the >> dr. parkinson. >> talked about the importance of stress testing. the extent you have a concentration of cre is important that you stress test your cre portfolio. >> i do think stress testing is important. especially for commercial real estate. i believe the good underwriting underneath those that are written are probably most critical. >> thank you. if the realnow estate downturn that has not turned around. there's always a point where
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things were over valued or not enough buyers are not enough tenants. but look in four or five years and things are a lot to different. we have the added benefit of very low interest rates. one of just kick the can -- why not just kick the can down the road? keep that going for 3 or four years, wake up and realize the market has recovered, prices are back up, borrowers are willing to pay more -- purchasers are willing to pay more, tenants are willing to pay more in rental rates. you got through this mess without the banks recognizing losses, without the banks impairing koppel and without the borrowers recognizing cancellation of indebtedness income. >> what is the problem of that?
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>> that would be a huge prediction. i think that it is important to recognize and have some transparency for the financial sector so that people know they have good loans or they do not. taking immediate action weather and it is modify and loans or writing the loans off, it seems it is one or the other. kicking the can down their road does not seem like an acceptable outcome the correct doctor parkinson. >> i would observe that strategy does not uniformly delivered success is stark. the better approach is to look at it loaned by loan, bar or by bar work and make an assessment as to whether they have the capacity to service the debt -- bar or by the borrower -- borrower by borrower.
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i would agree that we cannot count on kicking it down the road and producing the desired outcome. >> that is not being done -- that is being done some. as a whole, that is not being done. >> in the sense of deferring the problem, we hope it is not being done at all. in fact, that is in the best interest of both the bank and the borrower. guidance tries to make clear that doing that automatically or routinely to differ losses is not a good strategy. >> mr. wilson. >> i would add our guidance is clear that if you choose to work with the bar, it has to improve the prospects for -- if you choose to work with the to improve the
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prospects. there needs to be appropriate a crawl on the loan. charge-offs is necessary. -- the needs to be a corporate approval on the loan. >> the best approach is to recognize the economic reality, write it down, recognized the losses, take the hit to capital, and have discovery based on that. is that a fair assessment? back to my first assessment of rtc structures. that might not be the answer is the financial institutions that were holding the cre or in such perilous shape they cannot absorb the losses, they cannot absorb the hits to capital, and the borrowers cannot absorb the tax hits.
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is that a fair statement? >>ok. that is it. thank you. mr. silvers. >> to pick up where i left off. so we have a whole bunch of small banks that still have tarp money in the form of cpp. it is exposed to the commercial real estate sector. do any of you have thoughts on what to -- if our policy goal, and it would be mind if i was the policy maker, is to avoid further concentration on banking sector. if that is our policy goal, if we look like a small robot bank sector, any particular advice to treasury in terms of the management of tarp's investment in small banks over this period when these investments are
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coming due in commercial real state? >> i think many of the smaller institutions that have tarp are managing their portfolios accurately. i think there is a provision that tarp recipients missed dividends that they could add someone to oversee to the board. i do believe that the institutions -- there are several institutions that have concentrations and they are working their way through the crisis adequately. >> any further thoughts on this subject? >> mr. wilson? >> i am not close to the tarp program. pursuant to our 2000 and guidance, we have laid out how we would like to see this problem manage. this applies whether a bank has tarp or not occur if the bank
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needs to be resolved, i think it still needs to be resolved. >> it seems intuitive to me. if our goal is to try to keep the small bank sector healthy, that during this point but when small banks have had cre exposure will have to manage through the rollover of these loans, that it might not be a good idea to compel them to pay the treasury money back during the period. this is not an ideological observation. it is a practical one. would it be better to get them during the period to be subjective in raising the capital probably? >> i do not think we have been trying to force them to --we don't think absent a raise of
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capital that they would not be safe and sound had you done that. that really is the issue. we look at each one of these tarp repayments one by one and one to satisfy ourselves that either given the amount of capital they have or the amount of capital they can raise in the market, that post-car payment, they still have adequate capital to bear the risk that may be as a result of troubled cre assets. i do not see us forcing them to repay. the banks themselves field for a variety of reasons that the sooner they can repay the tarp the better. in most cases, they are quite anxious to repay. >> that is a very helpful. if part of our mandate is to look it is practical aspects of tarp, the other part of our mandate is that congress wanted
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this rather extraordinary intervention in the financial markets and for tarp to be done fairly. this may be asking too much of the three of you. i would ask you to comment -- what do we say to the executive of the employee or investor in a small bank debt is being unresolved by the fdic against the backdrop of what we did in terms of forbearance to institutions like citigroup and bank of america? how is that fair profit what to say to the person on the losing end of the un fairness -- unfairness? i guess we say nothing. is that really so? >> obviously the reason for the extraordinary -- the belief that
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if banks had failed in a disorderly manner, that the economy, the financial system might have been much more worse off, including those smaller institutions that did not benefit directly from that assistance. the too big to fail problem is a big problem. still working through the implementation so old, and how effective they will be, the jury -- we're working very hard to ensure that the so- called systemically important institutions were held to higher standards. that is the regulatory side of things. in terms of the market, that' there is no longer any authority
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to do open bank assistance. there won't be any benefit to the shareholders. i think all the agencies agreed that any holder of capital instrument should not benefit in any way from extraordinary assistance. i think the fdic has proposed that holders of blogger-term- -- longer-term debt be ruled out. they should do quite a bit to reinvigorate the market discipline the >> i think you are right. i would say what took place would help everyone in the economy. i think a lot was done to level the playing field between larger and smaller institutions. i think it tried to take away some of the competitive inequities between the largest and smallest. it did not remove too big to
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fail. the steps that were taken were necessary and in terms of the orderly liquidation. it will go a long way to help that conversation. >> my time has long expired. thank you. >> one comment i will make about my opening statement. i was hoping to get the point across that regulators had far too much blame for the financial crisis than was warranted. i think it was the manager and owners of firms. i wanted to ask a question about the fed. i believe the levels of bank reserves have grown back to $1.1 trillion. we could discuss why that is. their suits -- most of that is excess reserves. banks seem to have ample capital city at the federal
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reserve. does that give you some comfort when thinking about the cre situation? do you have a sense of how much capital is held by these banks, giving them a cushion? >> i do not know the answer to that question. aboutld say if the concerne the availability of lendable funds to meet the needs of credit worthy borrowers, the fact that the banking system as a whole is -- it pays so very little. i think they have ample motive to go out and find credit worthy borrowers. i think we're starting to see some signs that is tightening
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the credit conditions as this crisis comes to an end. they are looking actively for credit worthy borrowers to put that money to work. i do not know the answer to your specific question. i suspect that it is that the largest institutions. >> i suspect the same. i wasn't surprised there were not successful. i want to build on that last statement that you made about the overall lending. i want to ask the three of you -- there is a question about whether there is a lack of demand for a lack of supply. can you give me a sense of whether it is a lack of demand or supply? >> i think it is both. there is a lack of demand.
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i believe there are bar worse that lacked confidence. i think -- i believe there are borrowers that lack confidence. the biggest issue is collateral values. they are defined so precipitously. i just think that there is plenty of capital in the system. people have to start showing confidence in the financial institutions. i think it is slow. there's a tentative rebuilding. we are working our way to whatever this new norm is. when people accountable, they will go to institutions, apply for loans, and received credit. people are cautiously optimistic. we're not out of the woods yet. >> i think there is demand on the supply side. when you talk to the banks, i
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think it is a pretty good indicator for those borrowers. on the supply side, i think there are signs for a stronger borrowers. there is ample credit out there. there has been a real change in terms of the access to credit. some of that -- we do not want to go back to the availability credit that we hadn't 2006 and 2007. we want to go to a new normal. that does mean lots of people that could get credit formally probably won't be able to get it on the same terms today. it must be constraining their spending. again, if they ask what is the alternative, -- what is the alternative? >> i would point out that the
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demand and supply side that the federal reserve survey shows banks are saying they are not tightening standards beyond what they were. they are seeing demand starting to pick up. they said we do not like to rate the federal reserve pace. we would like to lend the money. i think there is a willingness on the part of our banks to put those back into a good -- back to good quality loans. >> to live. >> i would like -- thank you. >> i would like to follow up on underwriting criteria. it is so critical. the reference to the reserve senior loan officer survey does show that standard is largely unchanged in the fourth quarter. they are higher over the last decade. the majority of respondents
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indicate lending standards don't expect to return to long run norms until after 2012. we will remain tighter for the foreseeable future. is this a good thing to think we are -- work underwriting lax?ards to blao >> i think underwriting standards were lax. the return to the basic fundamentals of lending is critical. making sure borrowers have the ability and looking at other ways to generate income to repay the loans, i think that is critical because of regulators' sometimes were criticized for going too far and have banks in tightening and correcting those
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standards gone too far? evidence of that? >> regulators are criticized generally in looking at the crisis. there were things we could have done more quickly. i do believe that there were some steps that we could have taken to help deal with this issue. i think that the lending and underwriting standards that we have work collectively on for our guidance. good guidance is prudent and it will be sustainable in good times as well as bad because dr. parkton, what are you seeing in your assessment of the underwriting standards being used by lenders? >> i think you had it right. there was a lot period of tightening and the king for by based quartet were staters were too lax.
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more important than the specific standards, when you're assessing whether a summit is a credit- worthy borrower, and i think obviously confidence by the borrowers and by the lenders has been slow to recover. i guess there are hopeful signs that the economy in the last couple of months has been picking up steam. once people are convince that clear path of growth is sustainable and the most likely pass, you'll get a rebound in confidence. that is probably the most important thing in increasing the demand and the supply of credit. >> mr. wilson, you mentioned taking supply and demand into consideration having an impact on lending levels. you indicated it has a degree depending on the size of the
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institution, the type of the asset. can you elaborate so we can get a better sense of loan levels, whether big and small banks or the variety and type of loans? >> for example, in the community banks that do have big concentrations of commercial real estate, what we are going through right now, they are more sensitive. -- more sensitive of those risks. there probably are more tighter than they would have been. underwriting standards on almost any asset from 2006 or 2007 were too liberal. the pendulum swings too far the other way as things try to recover from problem loans. we are seeing evidence that they are coming back to balance pretty quickly, especially in leveraged loans. there are stories that the recap
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deals are very prevalent. pricing is getting tighter. in commercial real estate, pricing has tightened dramatically in the past couple of months. we feel like the supply and demand factors are coming back into balance. >> how much is preservation of capital at play into that issue of supply? >> that is a big problem with the community banks that are under stress. to some extent, it is in issue for all banks. it was sensitive and that is why the committee had to face in the goes through 2018. to be sensitive to that issue did not constrain lending because of capital requirements. >> thank you. >> i want to thank you for being here today. i want to thank you for your public service.
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i continue to be impressed with the overall quality and competence of the people who served in the federal government. anyone watching would be proud of the fact that you are representing all americans and doing a competent, intelligent job. i want to thank you for that. the second panel will come forth. mr. silvers has to leave. he needs to be somewhere else.
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>> will come. thank you for being here. thank you for working through these thorny and complicated issues. i am pleased to welcome our pal, matthew anderson, managing director. richard parkus, from morgan
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stanley research. .nd jamie woodwell thank you for coming. your complete written statement will be entered into the record. we begin with mr. anders said. >> thank you for the opportunity to discuss commercial real estate and bank stability. i will discuss real estate values declines and the resulting mortgage maturities and some aspects of our outlook for the economy. i should add the views expressed today are my own and not necessarily that of my employer. an important feature is the dramatic decline of property values. commercial property values have fallen by approximately 42%. that is larger than the decline
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in the 1990's when commercial real estate value fell by nearly 1/3. the rising volume has put pressure on the commercial real estate debt market and will continue to do so for the next several years. it has surpassed $300 billion in 2009. the commercial real estate debt maturities will climb to approximately 3 $25 billion a year. rising volume has resulted in a large amount of maturing loans that are underwater. as much as half of the loans are currently under water and that torture $51 billion is under water by 20% or more. as of the first quarter of 2007, more than 2700 banks and 30% of total bank account had a
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concentration. the greatest countries were among banks up to $10 billion in assets or a 56% of banks in those groups cre concentration. the number has fallen since 2007. just under 1300 banks and thrifts had a cre decline from the first quarter of 2007. part of this reduction is the result of outstanding debt. $300 billion of cre has been trimmed over the past two years. banks there received funds from tarps -- with tabulating concentration figures for banks and thrifts to received investments including banks that it repaid the funds with the result that's 32% of the
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recipients compared with 50% of recipients. delinquency rates have been declining. early estimates of 2010 indicates rates and commercial mortgage -- we maintain a watch list of banks that appear to be at elevated risk of failure. this was proven -- non- performing real estate loans have been the largest problem loan type through banks on this watch list. non-performing commercial real estate loans of the main problem loan type. conditions are improving, albeit slowly. the commercial real estate market, net operating income has
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been reduced by 50% or more. liquidity has been returning. this is been noted where new issuances occurred in 2010. the parent company expects this trend to continue with new issuance during 2011. we believe the recovery will be a ridiculous translate into increased demand. delinquency rates will increase. this process looks likely to last several more quarters. we're concerned about the volume of underwater mortgages that will mature over the next several years. continued demand for refinancing for loans will constrain inflation-adjusted growth in the commercial mortgage market over the next decade. we believe growth will more closely resemble the 1990's went
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annual growth was 0.8% rather than 9.4%. i thank you and the other members of the panel. this constitutes my formal testimony. >> thank you. >> my name is richard parkus. i am chair of the research committee of the finance council. i would like to thank the panel for giving me the opportunity to discuss the current state of commercial real estate and the potential impact on banks. i would like to emphasize the opinions i share today are those of my own. the question of whether commercial real estate will be the next shoe to drop is often heard. this shoe dropped to six years ago.
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commercial real estate has gone through the most severe downturn since the early 1990's. the downturn has been even more severe in the early 1990's. the vacancy rates have soared to greater heights. the drop in property prices has been much larger than during the previous episode. with respect to commercial real estate loans, most analysts expect the loss rates for cmbs originated during the bubble years of 2005 through 2008 will exceed the 9% to 10% losses experienced during the 1990's, possibly by as much as 4% or 5%. the credit crisis had a severe impact on commercial real estate markets. financing for large, high- quality properties, so-called trophy properties virtually
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disappeared. the bill believe of financing was set -- the availability of financing never completely dried up. some regional and community banks continue to lend, albeit at reduced levels. tarp brought calm. the flow of capital return quickly. the trickle of new capital has since grown into a flood. financing markets for a trophy assets has fully recovered today. financing is widely available and that favorable rates. the story is not as positive in the financing markets for smaller properties. the market remains highly dislocated and has seen little improvement since the depth of the crisis. the vast amount of capital that has targeted the trophy property segment has not made its way into the market for smaller properties. in some summary, -- this is
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reflected in the large difference in property price appreciation between the two segments. trophy property prices declined 39% between the 2007 market peak and the 2009 market trough, but has increased 70% since that trough. for the market as a whole, prices were down 44%, peak to trough, and have been effectively been unchanged since that time. improve the availability of financing is a critical step in the price recovery process. one of the main sources of financing is banks, both regional and committee, many of
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which continue to struggle with loan portfolios. taking steps to improve the availability of financing for small properties would undoubtedly improve the availability of these banks to work through their problem loan books. core commercial real estate loans and bank portfolios art exhibit the legacy rates in the 5.5% range. at least part of the reason relates to the fact that a significant portion of bank loans are floating rate. as short-term interest rates plunge, required monthly mortgage payments decline by as much as 60% to 70% or more. we believe the delinquency rates on banks and commercial real estate loans would be far higher, comparable to those of fixed rate loans in cmbs, which
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did not receive the benefit of debt payment relief. cuts both ways. this could have negative impacts on the performance of floating rate loans. and bank portfolios. higher interest rates would require mortgage payments. they could lead to declining property prices, exacerbate the already significant majority of maturing debt problem. without question, the biggest uncertainty facing commercial real estate debt markets it is the near term maturing debt. approximately $1 trillion will mature through the end of 2013. $375 billion of construction loans in bank portfolios that matures over the st. period brings the total to almost $ 1.4
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trillion. many maturing loans are receiving maturity extensions. we speculate the same is true in banks. simply extending problem loans does not represent a comprehensive solution to the problem as a whole. maturity extensions will help some borrowers. many are too far under water to be saved by this approach. a critical ingredient for managing smoothly through the mountain of commercial real estate debt maturity that lie ahead is a well functioning financing market. this is important for smaller properties, since they make up most of the maturities. the revitalized cmbs market has the potential to play a key role in helping to improve the availability of financing, particularly to smaller properties. enough to reduce the degree of
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stress as we work our way through this deleveraging process. i think you for the opportunity to share my views and i would be happy to enter any questions you might have. >> to live. -- thank you. >> in my testimony, i like to cover three general areas. the first is to correct some myths. the second is to highlight current conditions and trends. the third is to note some key factors that will affect commercial real estate market going forward. commercial real estate -- went industry professionals speak about this, they are speaking about office buildings, apartment buildings, shopping malls, warehouses, and other properties that have space in
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exchange for rental payments. this is distinct from two other markets. owner-occupied commercial real estate and construction loans. owner occupied commercial real state is closely tied. these distinctions are a key reason for some of the confusion about commercial real estate and help commercial mortgages have been forming in recent quarters. i think it is important to close clarify a few myths. the first is that banks are being weighed down. the second is there has been a wave of long maturities threatening the system. bank and thrift to legacy rates for commercial mortgages remain lower than the average for the
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overall place of business. commercial and multifamily mortgages continue to have the lowest charge off rates of any major loan type. since 2006, banks and thrifts charge-offs $127 billion of credit-card loans, $70 billion in industrial loans. $53 billion in other loans to individuals. but just $27 billion of commercial and multi-family mortgages. there has been a wave of commercial loan maturities weighing on the market. on monday, the third annual study will be released detailing $1.4 trillion held by non-bank lenders. the studies have shown that with a typical loan term of 10 years, most investor groups are spread over a relatively long period.
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this is in direct contrast to other forms of credit such as credit-card debt. commercial paper with the entire market matures every 80 days or less. we see the influence of the broader economy. the economy began to show modest growth during the third quarter. there was little new space coming on line. the impact has been marginal. property sales have picked up. they have not been high enough to keep up the mortgage -- the most significant factor in the performance of commercial real estate markets will be the performance of the broader economy. vacancy rates rose as jobs were lost, consumers pulled back in spending. economic growth is needed to reverse this trend. commercial real estate finance
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markets will be driven by property incomes, and values, and interest rates and where the markets are when loans come due. loans will mature and rollover. to the degree they do not, the existing equity and as a last resort, mortgages will be resized to 50 capital stock. the great recession has strained every part of the u.s. economy. long leases and borrowing terms has helped moderate the recession's impact. thank you for the opportunity to discuss this with you today. >> can -- i like to start -- my first question to all three of you has -- as the commercial real estate market hit bottom?
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>> i think so. the value -- price indicators would indicate that we have hit bottom for roughly a year. as mr. parkus mentioned, for prices haveeplaces, increased. we have not seen much in the way of strong price growth, and these for the broader market. >> mr. parkus. >> i also do believe that the commercial real estate market, in terms of fundamentals, we have to be careful what we're talking here about. in terms of the rents and vacancies, those dramatic declines that would give seen in the performance of the actual properties, i believe is approaching a bottom, and we
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will probably be at the bottom sometime in 2011 or 2012 for most property sectors. so yes, i do believe that that has -- we're at the bottom. the bigger question is, how long to we move along the bottom, as mr. anderson was saying. in terms of price improvements, we have seen dramatic improvements for a relatively small proportion of the commercial real estate universe, which focuses really untruth the assets and higher-quality institutional quality assets. and middle of improvement for smaller assets relatively. >> echoing some comments that were made, there are many aspects to the commercia real estate market. you can look at a whole range of different things. they move in relation to one another. prices probably are the leading
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indicator. they bore one of the leading indicators of the decline. now they are probably one of the leading indicators of a return. we have seen greater strength in the last quarter. i think is interesting to look at the different types of markets for a primary market with more institutional investors is probably more driven by investor yields than what competitive investor yields are, where the tertiary markets are probably more driven by the fundamental economics of what is happening in that market, the job growth, and how those are supporting individual properties. >> back to your question, how along theit bump bottom? >> our best estimate is that it will take several years for individual properties, the cash
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flow, the net income to begin to improve substantially. we think that a vacancy rates will begin to come down gradually probably sometime in late 2011 or 2012. but those improvements will tend to be offset by the sort of delayed or lagged impact of declining rents. declining rents do not flow through into property revenues until space changes. as space changes, it will change those rents in the properties even as rents are rising, begin to rise, space will be rolling in many cases to lower and lower rents. so that will drive the recovery out several years, we believe. property level improvements are probably late 2012 or maybe even 2013 phenomenon.
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i should say robust, a very significant improvements, which we do believe will also become. >> mr. anderson. >> i would generally agree. i think you have looked sector by sector. in the multifamily sector, there is some improvement. the lodging sector has shown some improvement, as well. lodging tends to be volatile and highly correlated with economy. with an improving economy, the lodging sector is an early beneficiary. -- office jobs are off almost 2 million jobs from the peak in 2007. it will take quite a while to build those jobs back up again. i think we're looking at a multi-year impact in the office market. >> echoing that last point, i
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think that sector is important. but the different types of commercial properties, you could think of it hotel having a nightly these. self storage haven't a monthly lease. the more muted the not impact your hotels and multifamily is seeing positive impact. >> thank you. >> following up on that, it does not seem like any of you see a double dip in the next few years. >> that is not a big feature of our outlook. it is possible. and external events can drive the economy back into recession,
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but it is not a major part of our outlook. >> i do not see anything like that. it would have to be driven, again, by some extraordinary surprised which is economy-wide. >> the market is being driven very much now by the economy. where the economy goes, so well -- so will the return of commercial real estate. >> and our rights by would definitely have an image -- an outright spike would have a definite impact on real-estate. the low interest rates have definitely benefited borrowers and lenders from the standpoint of avoiding some of the distress
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that could crop up in that segment, and also the broader commercial mortgage market. i think for banks, about half is floating rate, half is fixed rate. those are probably pretty good figures. a surge in interest rates could have an negative impact on borrowers ability to pay. >> i agree with mr. anderson. i think that rising interest rates do pose a non-trivial threat to commercial real estate, especially if the rate increases are significant. it also depends on what drives the interest-rate increases. someone on the previous panel made the very good point that if rate increases largely reflect a buoyant economic condition, where the fed is trying to rein in surging economic activity,
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that would be one scenario. that type of rising interest rate would be less problematic. on the other hand, today there is a lot of concern about future inflation, through commodity price inflation. that fear can get embedded in interest rates as well, as it appears to be in long-term interest rates already. it really depends on whether the interest rates are at the short end or the long and are rising, and what the source of the push up board is. >> there is enough. >> -- fair enough. >> if you think of the different cohorts of loans, loans that were made in 2001-2002 that might be coming due and now, they were made with relatively higher interest rates then we
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are experiencing now, so you have a bit of a cushion. as you get to 2004, the interest rates working -- interest rates were much lower, so they is will be coming due now and higher interest rates could have more of an impact on them. >> it sounds like you anticipate a slow recovery of the market over the next few years. may i assume from that that you do not see the basis or the need for aid targets -- for a tarp 2? >> i do not know about the out right knee. it would certainly have an impact. -- outright need. it would certainly have an
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impact. it would help clear the market of troubled debt that much more rapidly, but it would also have a cost and impact. there would be a significant increase in the rate of bank closures, whereas what we have been seeing is a high rate but, really, a process of working through problem banks. it would have an impact on the market. you'd have a sharp drop in prices, and it would come at a great cost. what we had in the early 1990's was a market that cleared, and then rapid growth after that. our outlook is for pretty much more of the same of what we have been experiencing for the past couple of years, just stretched out over a long period.
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>> during my opening remarks i referenced multi-family housing as a category of commercial real-estate. properties might deteriorated as rental income is transferred from maintenance to debt service. renters could possibly lose their homes. how do you see the impact on multi-family housing? >> for us, we focus on bank loan performance very closely. simply put, the delinquency rates on bank multi-family loans have been highly correlated. >> if you look at what has been
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happening with the homeownership rate, every percentage point drop in homeownership rate means essentially a 3% increase in demand for rental housing. with the drop in home ownership, we have seen a large surge in demand for rental housing. a lot of that is for single family rental housing, but there is a fair amount going into the apartment sector as well. notwithstanding the fact that apartments do have those annual leases that turned over the course of the recession, the multi-family sector, the apartment sector, has been among the better performing commercial real-estate sectors in terms of fundamentals. that has rolled over to generally good performance in many of the different investor groups that lend money for multi-family mortgages. the one exception there is in the cmbs market, multi-family
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mortgages do have a delinquency rate that is higher. >> do we face a shortfall in available rental properties? >> a lot of folks have studied that. we have looked at some of those numbers as well. it does appear that with the vacancy rates, there's still a relatively high levels. with that demand, those vacancy rates still remain high. we will see once we burn through much of the demand is there. >> are there ways that bankers and borrowers are working together with local and state financing authorities to ensure that tenant living conditions are not negatively impacted by the commercial real-estate crisis? >> i guess i would just put up there that the servicer and the lenders themselves of and have some of the greatest stake in making sure the property
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maintains its ongoing operations and value, so they are working very closely in those situations to keep those properties operating well. >> are there any unique issues that should be highlighted distinguishing multi-family from other cerere's? >> our outlook for multi-family is dramatically better than for other sectors in the near term. as some of my colleagues have mentioned here, the restricted state of credit for the single- family housing sector has redirected much of the new family formation process to multi-family, and we have seen dramatic improvements in vacancy rates, dramatic improvements in
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rents over just the last three- six months. we think that will continue. the medium term demographics look very good. in terms of the very stressed operating environment that we have just come through and the impact on residents in these properties, i would also very much agree that the absolute most important objective of special servicers is to make sure that the properties do not deteriorate to the extent that they have any control over that. and they do, generally. keeping enough cash flow to keep up maintenance and other property expenditures is very, very high, otherwise the value of the properties deteriorated. >> years servicers of commercial rs ofages are -- your server i
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commercial mortgages are better our servers of' servic residential mortgages? >> and did not say that. >> the want to look and what happened over the early part of the decade. iit has often been characterized that there was a bubble in the commercial real- estate market. that is not a particularly useful concept. recently, an economist presented data that suggested the relative to 2000, investment in commercial real-estate actually fell in real terms.
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resources were flowing into residential markets, dragging the price of land, the price of labor and the price of input. would you characterize it as a bubble? was a reflective of what was going on in the housing market, or was it simply over- optimistic investors in the real-estate? >> it is a great question, and i think it is really important to understand what the market has been going through. it is one thing that we cinclude in our written testimony. at real estate prices as compared to the dow jones
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industrial average. there are parallels. absolutely, construction costs were high during that time and rising. when one looked at property performance, it was very strong. mortgage performance was very strong in that preceding time. i think it did lead to a lot of optimism that people wish they could rewind a little bit right now. >> i would say that there was a bubble. i would say -- i cannot define a bubble. i cannot do it here. but i would say that what we saw in the early part of this decade -- and let's not forget. commercial real estate went through a mini-downturn in 2001- 2002, and really did not come out of that until late 2003- 2004.
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because of that, we saw relatively little over-building this time around. over-building was beginning to show its ugly face in 2006-2007, but was cut off very quickly in 2008. we owe the previous downturn a gesture of thanks for keeping the over-building away this time. what we did have coming out of the last downturn was extraordinarily low interest rates, as we have right now. extraordinarily low interest rates drove many investors to demand riskier and riskier products. we also had a tremendous increase in the size of the pools of so-called "hot money" in the international finance market, seeking yields wherever.
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all of those conditions came together to create bubble-like conditions, not only in commercial real estate, but across the spectrum in terms of leveraged loans, in terms of all credit products. in terms of corporate bonds, we saw a loosening of lending standards driven by a loosening of what investors would accept. the demand for yield was dramatic and was driving -- really drove the decline in lending standards. in normal conditions, investors do not put up with that. in those kinds of conditions with extraordinarily low interest rates, investors were amenable to almost anything. >> i would add quite a few comments. i think there was a bubble. in terms of the definition of a bubble, maybe one definition
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would be a rapid rise that is really unsustainable. now, whether you would know it was unsustainable at the time may be something else, but certainly one feature of the price increase that occurred during that time was that it was almost all based on pricing as opposed to income. the way real estate prices are generally thought of is in terms of an income stream that is capitalized. the capitalization rate came way down during that time, and that drove all of the increase. net operating income grew a little bit, but not that much. it was all from declining capitalization rates. how did the cap rates come down? well, part of it was the availability of financing. a very liquid debt market very much contributed to declining cap rates. if you had to pay all cash for the property, you would have a very different standard for what
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sort of price you would pay. whereas, if you could borrow ever greater amounts, which borrowers could heading into the bedroom, you can pay ever higher prices -- heading into the boom, you can pay ever higher prices and still generate a return. good cash flow performance helped keep delinquency rates very low. it appeared from a lender's standpoint to be a very safe, low risk area to be landing in. -- lending in. i think those factors really played together. i remember vividly in 2006 seeing a presentation, a very credible argument for why cap rates could be 5% or even lower
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and that was unsustainable. i went in as a disk beleaguer and came out, not exactly -- as a disc believer -- disbeliever, and came out, not exactly being a believer, but believing there were credible arguments as to why the pricing could remain where it was sad. >> thank you. >> i would like you to comment on when you expect to see the majority of losses from defaults. >> we do not have any models that would predict that. i do think, based on the loan maturities survey that we are looking at, as folks have discussed, there is sort of the income perspective on thing and then the maturity perspective. which will be driving those? different investor groups have very different maturity profiles, so that if there is a
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maturity issue facing mortgages, a different investor groups will see them at different times. instance, have int a 40-year maturity. credit companies and banks have a short-term period to the degree one is focused on maturity, one would look at those schedules. to the degree was focused on income-driven, then we are back to the discussions of different property types having very different situations where, for instance, hotel, multi-family, those are short-term lease terms. they have probably seen the bulk of the hit to their noi, whereas the longer-leased properties were not as dramatically hit by
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the downturn in terms of their bottom line, but likewise will not see as quick of a rebound. >> i think it depends on the location or the investor base. mbs, we are beginning to see losses ramp up very quickly now. it depends on the extent to which problem loans are pushed out and extended, and how long the process lasts. there will be a combination of loan extensions and foreclosure and liquidation. losses are already ramping up very quickly now. we expect losses to remain high for this year and through next year. the difference is that the sources of losses in the near term are from term defaults, what we refer to as term defaults, where properties
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simply cannot make the mortgage payments and are foreclosed and liquidated. sometime in 2012-2013, that will come more from maturity-related defaults. on the bank side, it really is a question about, i believe, when banks seriously begin to deal with the problem loan portfolios. >> when do think that will be? >> i think within a couple of years. i think the regulators we heard from today are right. i think as soon as individual banks have the financial wherewithal to deal with these problems, they're being forced to deal with them, but it will also be dragged out because many banks do not have the wherewithal to date. >> actually, we do model that for banks to try to estimate what the ultimate losses will be
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for banks and how far along they are through that process. banks in aggregate, including large and small banks, are through 50%-60% of the defaulted commercial real estate loans. we are past the halfway point, but there is still quite a bit more to come, we think. the earlier panel noted that banks have been provisioning less over the last few quarters. you can kind of take that two different ways. you can take it as a glass half full interpretation, that banks see the light at the end of the tunnel and feel less of a need to add to loss allowances. the converse of that would be that, i think that there is an
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10 intense pressure to maintain capital. -- an intense pressure to maintain capital. there is certainly an incentive to work through the problems, but banks have been doing it for the last two-three years, and given that they are past the halfway point, i think they will be added for another couple of years probably. -- at it for another couple of years, probably. >> do you think it would be critical that congress provide more money to bailout financial institutions due to their commercial real-estate loans? >> that gets to an area really outside of my domain. i guess i do not feel that i should be speaking to a question
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about really addressing how to deal with banks. my expertise is in commercial real estate. if i understand your question. >> fair enough. >> i do not think i have the adequate knowledge to address that adequately. >> my question is, can these banks work through a commercial real-estate problems by themselves, or do they need assistance? small banks and large banks both? it sounds like, given a few years, things will turn out ok. it is going to be rocky for a while, but it is going to turn out ok. that would lead me to believe that there is really not a need for an rtc, tarp 2, or something
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along those lines. >> i think i've understand what you're getting at. an rtc is traditionally for banks in receivership. does it make sense for the fdic and regulators to consider an rtc solution for the large number of loans that they are taking in from failed banks? they should certainly consider it. it is another form of securitization, and quite frankly, that is what gave rise market in the first place, in the early 1990's. on the other hand, you have to look at the cost benefit analysis. how much can they get by liquidating loans in the way they are currently doing? it is difficult for me to make that cost-benefit analysis.
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i would certainly think that it is a potential outlet. whether or not it is more cost- effective than the current disposal methods, i do not know. >> ok. help me understand, since all three of you think the market will turn around in the next few years, taking the approach of simply extending loans today at favorable rates. we have low interest rates. rowling those on a short-term basis versus dave -- rolling those on a short-term basis versus the other approach? in one sense, i think you have to look at it alone by loan, bar or by a borrower, a
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property by property. -- bar work but are aware, property by property -- borrower by borrower, property by property. if lenders are of the general view that markets are gradually improving, then at least in cases where they think the borrower will get right side up again and be able to ultimately keep current on payments and ultimately repay the loan, that is a sound strategy, as long as it works out. in cases where the bank does not really think that is too likely, it would not really be appropriate, especially if, for whatever reason, the value recovered a year or two or three from now might be lower than it would be right now. then certainly it makes more sense to put the pressure on now and try to deal with that
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problem sooner. in terms of modifications and charge offs, that has to do with whether the bank, after their analysis, and it seems that to be a better income them outright foreclosure. -- a better outcome than outright for closure. the borrower does have to be current in order to even qualify for that. >> and there could be some incentive to do that, not so much because that loan in two or three years is going to be in the money, but that the institution itself may be stronger in two or three years, able to observe a loss in two or three years. >> i basically agree with that. that if you have a
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borrower with a loan in the market, in order to refinance, the market has a maximum ltb. that makes sense as long as you believe the borrower has good intentions, as long as the property is likely to improve as opposed to deteriorated. there are many cases where we think extensions make a lot of sense, but there are many cases where extensions clearly do not make a lot of sense. there are many loans out there that are not 85 ltb, they are 130 ltb. these loans will not be a viable
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in the future under any scenario. that is what happens when you have a 40%-50% price decline, and the original ltb was not 70, but 90 or 95. in those situations, we do not think that is a helpful approach. >> thank you. i find it interesting, and hopefully constructive, to make some comparisons between the commercial real-estate prices and the residential mortgage prices. when you hear about the factors that contributed to investors seeking higher yields, a weak underwriting, low equity, too much leverage, too much focus on collateral, lots of similarity. until you get down to the comparison that on the residential side, a high number
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of borrowers were less sophisticated and did not understand what they were getting into. brokers took advantage of those borrowers. that they do not see on the commercial real-estate side. we have some of the most sophisticated developers in the country. can you speak to this issue? are there lessons learned, or making comparisons or differences? >> a lot say that for the most part on the commercial real- estate side -- i would say that for the most part on the commercial real estate site, certainly what we see, we deal with borrowers, for the most part that are fairly sophisticated. one of the huge differences, i think, between residential and commercial, is the degree of fraud that was out there. there was a lot of a pay city in the residential side, and there was up -- a lot of opacity in
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the residential side, and there was a lot of outright fraud. in the commercial real-estate side, there was not much fraud. you might be able to find a couple of questionable loans, but we are not here because investors did not understand the nature of the loans that were being made. i think we are all guilty in the sense that very bad loans that clearly should not have been made were made. >> was the same euphoria applicable, the feeling that prices would always go up? >> yes. i think the idea that rising prices just validates -- the idea that prices will always rise just gets built in to a
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mentality, and when you have, as an investor, you need to reach a certain debt hurdles. you're willing to cut corners. you are willing to believe that, well, maybe this will perform. maybe this clearly inadequate loan -- and then, maybe the next time, maybe this even worse quality loan will perform. you get swept away along those lines. >> you see this from both the commercial and residential side. >> i might draw a distinction between the reasons for purchasing a home, and the reasons for investing in a commercial property. someone purchasing an office building or a shopping center is looking at that as an investment, as something that is both going to drop in income and, essentially, get dividends -- draw in income, and
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essentially, get dividends. the heightened expectations versus the income of a property can lead to prices exceeding the growth of income, which is something that we saw during 2005-2007 period. but i think we need to realize they're a very different motivations between those purchasing houses and those purchasing real-estate. >> i would agree. there was not the subprime element in the commercial real- estate market. as you pointed out, they're generally sophisticated borrowers that understand the terms of what they're agreeing to. >> so sophisticated it a good vantage of the system? what's the might of been -- so sophisticated that they took advantage of the system? >> there might have been a
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little bit of that going on. the irony is that ever higher prices -- the sense of risk was diminished. and yet, that was when the risk was greater. >> thank you. >> a number of you have made distinctions between sectors of the commercial real-estate market in your comments. unlike to -- i would like to explore that a little bit more. what are some of the differences that are producing these different performances? >> i think the big difference is in the price performance.
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we're seeing trophy properties and institutional quality properties appreciate at a much more significant rate and smaller properties not. i think that is largely the result of institutional investors. when institutional investors come in, they look for higher- quality properties. there has been a tremendous interest from institutional investors all over the world in high-quality u.s. commercial real estate properties. smaller properties are typically outside of their purview. they do not invest in small, multifamily, for the most part, small, multifamily properties. they invest in large office properties in gateway cities. my point was that there was a very significant bifurcation going on between the haves, the
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very best, and kind of the have nots, which was a very large portion of the commercial real- estate sector. >> listening to your comment, it seems like you indicated that the differences were reflected in the fact that the trophy properties were seeing a greater appreciation in price. there is a reason of why they had an easier time getting financing. >> they had an easier time getting financing because there is an intrinsically greater demand from those type -- for those types of assets. if you have an asset for which there is a lot of interest, lenders will be very interested as well. >> to pick up on the demand for trophy properties argument, i
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think that is true. what you tend to see in a market downturn with lower rents is occupants or occupiers of space being able to move up the quality of space at roughly the same rent. they may move from a peak- quality space in the office sector -- a b-quality space in the office sector to an a- quality space with little change in rent. what happens then is that the b-quality spaces experience greater vacancy. >> you focus on commercial development and construction. that seems to be the difference between your view and some of
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the other views we have heard. can you expand on that a little? >> sure. it seems like everyone is peeling off the construction activity that was driving a lot of the numbers we have seen in that broader category. in terms of the distinction between primary, secondary, tertiary markets, a think what you have there is, in primary markets, you have a $100 million investment, in a tertiary market, $500,000. large, institutional investors who are drawn to those hundred million dollar investments -- it would take a whole lot of tertiary market investments to get to one of those major market investments. there is a natural break with more local investors playing in the smaller secondary and
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tertiary markets. larger, more in institutional players are in the primary markets. the credit crunch probably had more of an impact on those large, international, institutional investors, and then then the recession had more of an impact on date tertiary investors. slightly different forces impacted different investors. >> a lot like to emphasize the demand from lenders. -- i would like to emphasize the demand from lenders. the ultimate lenders, in many cases, are not the banks, but investors in cmbs. those investors have a strong preference for high-quality assets, when you can get them. why would lending focus on trophy assets vs smaller assets?
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i think -- and large banks as well. >> that concludes our meeting. i want to thank you for being here today, for your excellent testimony and dealing with our questions. i also want to take a moment to thank a member of our professional staff. we of had 27 hearings, and everyone of them has been organized by patrick mccready. i want to thank you for your good work. this is not our last hearing. until the next time, which will be our last hearing, this hearing is adjourned. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2011] >> this afternoon, press
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secretary robert gibbs will be holding a briefing with reporters. he will be talking about the recent release of an innovation report and obama's plan for energy-efficient building. we will have that live for you when it gets started. the senate gaveled out to just a short time ago after general speeches most of the day. when they return to work tomorrow, they will continue working on a measure the real authorizes the federal aviation administration, a bill aiming to modernize the air traffic control system. we expect to see debate on amendments with several votes. you can watch the senate live on c-span2. the house returns next tuesday for legislative work. see the house right here on c- span. tonight, a former alaska governor's sarah palin speaks of
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the opening big want to mark the 100th anniversary of ronald reagan's birth. that is tonight starting at 11:00 p.m. eastern here on c- span. >> sunday, on "the book tv," the founder of the american spectator magazine has written over a half-dozen books including, boy clinton, the conservative crack up, and madam hillary. his latest, "after the hangover, the conservative road to recovery." that is live sunday at noon eastern on c-span2. >> the whole environment of politics has come apart. i mean, it does become polluted and destroyed and violent. >> sunday, a documentary producer it speaks about hubert humphrey and the art of the possible. >> the whole reason of doing the
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documentary was to show this side of this. everyone remembers hubert humphrey as someone looking lyndon johnson's puts the whole time, with no mind of his gun. people do not understand the pressure he was -- no mind of his own. people do not understand the pressure he was under. >> as the conflict in egypt grows more violent, foreign policy experts discussed the it of violence and the administration response. this event was hosted by the brookings institution. it was just over an hour. admit -- brookis instituon, and this is a little bit more than an>> f "meethe press" at brookings with david gregory. we bring this to you together
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with the center. the director was with us this morning on the panel as well. he is a expert on the u.s. national security and military affairs. he has been the director of persian gulf affairs for the national security council. is the author of "path out of the desert: the grand strategy for america in the middle east." we are very glad to welcome to "meet the press" at brookings, the associate dean at the school for our services at georgetown university. she was for a decade the executive director of freedom house. he is a professor of political
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science and international studies at mcdaniel college. he is an expert on the politics of north africa. he has just completed a policy analysis tape which you can find on our website. the perils of complete liberalization, about the challenges of polics in north africa. on the big screen or the small screen we see someone who will join the discussion. he is the director of research at the brookings center theqatar, an egyptian by nationality who focuses on islamic political parties. . .
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>> i never thought in 35 years of studying the middle east that i would see the events that are unfolding before my eyes at this moment. it is a very scary time, not just for the authoritarian leaders there, but for those who wonder about where this of the tile region will head. we are indeed in and chartered regione this volatilite will head. we are indeed in uncharted waters. to davidy grateful gregory for hosting this panel. >> thank you. welcome to everyone here and
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those watching on television. this has got to be the most exciting conversation thus far because we are in a breaking news situation. for journalists like me, it does not get any more exciting or more vital, to have a conversation like this, and to be surrounded by such expertise at a time when there is such confusion happening on the ground. that is where i want to begin. but the question of what is happening is all the more important because of the uncertainty. what is happening? what do we make of the state of confusion? what's happening? what do we make of this state of confusion? >> we're not exactly sure what's happening? cairo is now kind of recovering from the battles of the last 24 hours. the army seems to have moved into position between the competing cps of demonstrators
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going from mubarak, those saying it is enough and supporting it. the prime minister has just apologized for the actio yesterday but the big questions, what will the army do and particularly what will the army do tomorrow? friday is a time when everybody will be coming out to the mosques to pray and coming out to the streets demonstrate. one can assume that will happen across egypt and not just in cairo. w the question is does mubarak have the strooge in effect stay in power and oversee a transition to his people? >> let me pick up on that point, shad sharksd who is in doha, let me go to you on this question. the end game here for mubarak, how do you read him?
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-- shadi hamid, who is in doha. how do you read him? >> he doesn't want to leave power. he is planning on staying until september when the elections will be held. the protesters are clear about what their single overarching demand is for mubarak to step down and not in several months but immediately. i think yesterday what we saw is the official start over the counterrevolution. i think people caught caught up with the euphoria of the first few days and thought this is an effective strong regime. what we have seen yesterday was a concerted effort. i think we saw sniftmoot yesterday to previous days where we saw in some cases over a million protesters. >> >> shadi can talk about the
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muslim brotherhood as well and other opposition groups who have been somewhat silent here. elbaradei said nobody is sitting down for conversations with the mubarak regime until he actually leaves power. talk about where protesters are. they understand if they are not inhe streets forcing the issue, they lose a lot of momentum. >> absolutely. one thing the protesters have going for them is the inrnational media spotlight on them. mubarak doesn't want to leave power. they are being constrained by the international media attention on them and that's why it is critical that the protesters are able to keep the media with them. it is why you have seen the counterrevolutionary forces, the pro government forces trying to beat up journalists to try to shut down coverage of the square.
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once the media spotlight is gone, their freedom of action is going to be greatly enhanced. >> this is not napping a vacuum. this has been a broader movement until this point. what is happening beyond what we're seing in cairo? >> sure. everybody is watching. the autocrats from algeria to yemen. and elsewhere are rooting for mubarak because this is the scenario that we're seeing unfold in egypt, tt's what we expected to unfold in tunisia but never did. the surprise for the people and for other autocrats is how quickly that regime crumbled. when he left tune ease yarks he called his counterparts in algeria. he was stunned.
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he said an algerian president would never flee and this is a regime that was willing to fight and to take the country into a catastrophic civil war that cast -- cost 200,000 people. that's what we're looking at. so the people, as martin said, fascinating from morocco to algeria. they are looking at how it is going to move. that's where we are. from morocco to where i'm from, algeria, everybody is watching the reaction, also the united states. >> jennifer, i want to bring you into this. talk about a freedom movement that is around the region.
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the king of jordan dissolves his cabinet. the leader of yemen saying he will walk out of power later on in the year. mubarak himself saying he will be gone by september even though they are calling on him to leave now. this is quite an effect. >> well, it certainly is unprecedented. egypt is a region considered one of the most oppressed in the rld. there have been some signs of movements forward, especially, i uld say, on the part ofivic groups and independent media, satellite and bloggers, really trying to open things up, even in repressive countries. so -- and so i'm rooting for them. i think that -- that this tells everybody that said that middle east is not capable, does not really want freedom. there is obviously a constituency out there.
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it is too soon to tell where it is going to go. there is many, many steps. there is a long road ahead in terms of getting from protests on the streets a democrat system in place. >> i want to talk about the u.s. response but i want to go quickly back to shadi. one piece of this, we're talking a lot about it in this country, shadi, is the muslim brotherhood. where are they? were they caught flat food? are they poised to become a major threat here? >> up until now, the brotherhood has played a limited role. they have not been visible in the protests, but that is by design. they realize if they a prominent role they will trigger fear in the community and particularly in the u.s. they are aware of that. i was just speaking to some
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muslim brother figures over the phone today. they plan to get more involved. they want to emphasize they don't have any leadership aspirations and are leading their -- lding their support behind elbaradei as a potential leader. it is interesting to note, though that, the brotherhood has kind of moved and tried to make some public statements to allay some fears so there have been several leaders who said they will abide by the peace treaty. one said that just the other dained another who said we will affirm all past international treaties. the argument can be made how genuine are the brotherhood leaders when they say this? i think it is interesting that they have gone out of their way to make that point the the international media. >> mohamed elbaradei, former
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head of the iaea. is he electric wolenza or not? >> he might be the leader that -- there are a lot of historical examples that make us very cautious. there have been lots of good, moderate liberals inserted into a revolutionary system that were swept away. one of the things we ought to think about is the muslim brherhood, they are the minshoviks of the revolution. a critical element of al qaeda are probably right now if, they haven't already done so thinking this is our moment. this is the revolution we have been trying to create for 30 years in egypt and my guess is
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like that lenin, they are trying to get these people back to egypt to stir up the situation to seize this revolution. >> was part of the brotherhood himself, the founding kind of intellectual father of al qaeda. >> they have to not only deal with mubarak but also the extremists. >> i want to come back. this is a fascinating topic. >> it is very interesting to see. even though we do not see the military acting in the square, they are acting on the borders. they are controlling the borders. they are controlling the airport. they just sent more forces into the sinai making suring in comes out or comes in gaza. the silent hand of the military is still there and functioning. >> would you expand on


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