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[Fee Simplistic] The Greenspan Doctrine: “Protecting The Stockholder’s Interest” Or Watch Those Assumptions

Fee Simplistic is a regular post by Martin Tessler, whom after 30 years of commercial fee appraiser-related experience, gets to the bottom of real issues by seeing the both the trees and the forest. He has never been accused of being a man of few words and his commentary can’t be inspired on a specific day of the week.

…Jonathan Miller

For those who saw former Fed Chairman Alan Greenspan’s testimony before Congress on Thursday October 23rd it was almost a mea culpa but no cigar. When queried by Congressman Waxman as to why he did not intercede with regulations to prevent the banking world from continuing its underwriting and issuance of CMBS & CDO sub-prime bonds and their toxic derivative permutations Mr. Greenspan answered that he believed the market would prevail to correct abuses as Wall Street would act to protect its shareholders. Those of us who dealt with the investment banking community knew that it was really the year end bonus pool that governed Wall Street’s actions and not stockholder interests.

The failure of the Fed and the SEC to act in a situation absent loan underwriting standards coupled with off-balance sheet securitization where the underwriters and lenders had no “skin in the game” defied logic and economic reality much less common sense. You did not need a PhD in economics to understand that disaster was lurking around the corner which FEE SIMPLISTIC called attention to on several postings. It was all based on an underlying assumption that the market would be on a perpetual rise and values would escalate so why worry?

All of this pales against more astute commentary from my country weekend neighbor who is employed by a major equity buyout firm. As we were discussing the state of the real estate market this past July I commented on the Blackstone Group’s purchase of Sam Zell’s Equity Office Properties portfolio back in early 2007 and how they immediately sold off groups of properties to other investors at substantial markups. FEE SIMPLISTIC (May 2007) [1] noted it was like buying wholesale and selling at retail. One of the buyers at $7.25 billion for 8 midtown Manhattan buildings was Macklowe Properties who ended up having to surrender title because they could not sustain the debt service. My neighbor commented that the “smart money” guys that he worked for in the buyout firm always said, “when Sam Zell is selling you don’t want to be buying”.

So the question is: after all these years of listening to the former Fed chairman spout his inscrutable prognostications about the economy, the credit markets and interest rates should we have been listening and watching Sam Zell?

And the corollary is: will the recessionary cycle end when Sam Zell starts buying again?