[Senate Hearing 111-320]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 111-320
 
                         COMMERCIAL REAL ESTATE

=======================================================================

                             FIELD HEARING

                     CONGRESSIONAL OVERSIGHT PANEL

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

           HEARING HELD IN ATLANTA, GEORGIA, JANUARY 27, 2010

                               __________

        Printed for the use of the Congressional Oversight Panel


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                     CONGRESSIONAL OVERSIGHT PANEL

                             Panel Members
                        Elizabeth Warren, Chair
                           Richard H. Neiman
                              Paul Atkins
                             Damon Silvers
                           J. Mark McWatters


                            C O N T E N T S

                              ----------                              
                                                                   Page
Statement of:
    Opening Statement of Elizabeth Warren, Chair, Congressional 
      Oversight Panel............................................     1
    Statement of Kasim Reed, Mayor of Atlanta....................     1
    Statement of Paul Atkins, Member, Congressional Oversight 
      Panel......................................................     7
    Statement of Damon Silvers, Deputy Chair, Congressional 
      Oversight Panel............................................     7
    Statement of J. Mark McWatters, Member, Congressional 
      Oversight Panel............................................    12
    Statement of Richard Neiman, Member, Congressional Oversight 
      Panel......................................................    16
    Statement of Jon Greenlee, Associate Director, Division of 
      Banking Supervision and Regulation, Board of Governors of 
      the Federal Reserve........................................    20
    Statement of Doreen Eberly, Acting Atlanta Regional Director, 
      Federal Deposit Insurance Corporation......................    36
    Statement of Brian Olasov, Managing Director--Atlanta, 
      McKenna, Long, and Aldridge................................    64
    Statement of David Stockert, Chief Executive Officer, Post 
      Properties.................................................    70
    Statement of Chris Burnett, Chief Executive Officer, 
      Cornerstone Bank...........................................    98
    Statement of Mark Elliot, Partner and Head of the Office and 
      Industrial Real Estate Group, Troutman Sanders.............   111
    Statement of Hal Barry, Chairman, Barry Real Estate Companies   130


            ATLANTA FIELD HEARING ON COMMERCIAL REAL ESTATE

                              ----------                              


                      WEDNESDAY, JANUARY 27, 2010

                                     U.S. Congress,
                             Congressional Oversight Panel,
                                                        Atlanta, GA
    The Panel met, pursuant to notice, at 10:04 a.m. in room 
132, Georgia Institute of Technology, 85 Fifth Street, NW, 
Atlanta, Georgia 30308, Elizabeth Warren, Chair of the Panel, 
presiding.
    Present: Elizabeth Warren [presiding], Damon Silvers, 
Richard Neiman, Paul Atkins, and Mark McWatters.
    Index: Elizabeth Warren, Damon Silvers, Richard Neiman, 
Paul Atkins, and Mark McWatters.

  OPENING STATEMENT OF ELIZABETH WARREN, CHAIR, CONGRESSIONAL 
                        OVERSIGHT PANEL

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

           STATEMENT OF KASIM REED, MAYOR OF ATLANTA

    Mr. Reed. Madam Chair, distinguished members of the Panel, 
welcome to Atlanta.
    Good morning. It's a pleasure to welcome you to our city 
and to one of the nation's premier institutions of higher 
learning, Georgia Tech. I believe that Georgia Tech is an ideal 
environment for this important panel to conduct its work. 
Problem solving is indeed etched into its culture. Known for 
educational excellence and academic rigor, the solution to 
many, many tough problems have been conceived on this historic 
campus. It is my sincere hope that this tradition will continue 
as some of our country's greatest tests face us right now.
    As a newly elected mayor, I am especially grateful that the 
Congressional Oversight Panel has chosen our city as the site 
for these crucial discussions on the condition of the 
commercial real estate market. Atlanta is a city whose fiscal 
ebb and flow is closely tied to the fortunes of this sector of 
the local and national economy.
    It is not news to anyone certainly in this room that our 
city has been one of the hardest hit commercial real estate 
markets in the United States. Commercial property values have 
seen sharp declines. Applications for new construction permits 
have fallen off to the most alarming levels that I have seen in 
50 years, and we have had more than 30 banks fail in Georgia in 
the last two years. The current rate of decline is untenable. I 
use the word untenable after much consideration because a 
declining commercial real estate market has a compounding 
impact on our city's tax base, our employment levels, and the 
availability of affordable housing for our families, and this 
threat to the vitality of our city, our nation, and our state 
must be met with action.
    That said, I do want members of this panel to know that the 
scope of the challenges that Atlanta faces are substantial, but 
we are willing to work as partners. Our citizens are uniquely 
aware of the existing realities and the burdens to be born in 
order to turn around our local, regional, and national economy, 
but we are also very optimistic in our hope that there is an 
impending recovery. And we know that your work is an important 
part of the recovery. We hope that the solutions developed from 
today's discussion will play a role in the reversal of fortune 
within the commercial real estate market and, by extension, the 
larger economy.
    Please know that in our city you have a partner who is 
willing to work with experts from the public and private sector 
to stabilize the various markets within our economy. Thank you 
for the opportunity to speak with you today, and may your 
hearings be just as productive as they are necessary. Thank 
you, and welcome to Atlanta.
    Chair Warren. Thank you very much, Mr. Mayor. We appreciate 
it. We are going to start with some opening statements from the 
panelists and then we'll call our first panel of witnesses. So 
thank you, Mr. Mayor, for being with us.
    Mr. Reed. Thank you.
    Chair Warren. The Congressional Oversight Panel was 
established in October of 2008 to oversee the expenditure of 
the $700 billion dollar Troubled Asset Relief Program, or TARP, 
as it is commonly known. We issue reports every month on 
different topics, mostly trying to evaluate the Treasury 
Department's administration of this program and their efforts 
to stabilize our economy. As part of our work, we travel from 
area to area to try to go to the places that have been hard hit 
by various aspects of the financial crisis. This morning we 
have come to Atlanta to learn more about the wave of 
foreclosures and vacancies sweeping through your commercial 
real estate markets.
    To prepare for this hearing we did some research and what 
we discovered was deeply disturbing. We learned that vacancy 
rates for Atlanta retail and office space grew throughout 2009, 
eventually topping 20 percent. Commercial property values have 
declined across the board and the price per square foot of 
office space has fallen by 50 percent. These declines have 
severely threatened bank balance sheets, contributing to the 
failure of 30 Georgia banks since August of 2008, more than any 
other state in the nation.
    Many experts believe that Atlanta's experience could 
foreshadow a problem that could echo across the country. Such a 
crisis could cause damage far beyond the borrowers and lenders 
who participate in any one transaction. More empty storefronts 
means more lost jobs, more lost productivity, and prolonged 
pain for middle-class families. Commercial loan defaults could 
lead to deep losses for banks and potentially raise the specter 
of more taxpayer-funded bailouts.
    Foreclosures in apartment complexes and multifamily housing 
developments could push families out of their residences even 
if they have never missed a rent payment. And because the 
modern financial industry is so deeply interconnected, a 
downturn in the commercial credit markets could spread to the 
rest of our financial system.
    Against this backdrop, the Panel is holding today's hearing 
to explore the troubles in commercial real estate. We hope that 
by learning from Atlanta's experiences, we may better advance 
our oversight responsibilities and public understanding of this 
important problem. No one can predict the course that 
commercial real estate will take. The problems appear at a time 
when banks are already weakened by massive losses. So we need 
to closely examine the stability of our banks.
    For example, the stress test conducted last year examined 
financial institutions only through 2010. We ask the question 
how these institutions will cope with a commercial real estate 
crisis that may produce losses in 2011, 2012, and 2013. Whether 
or not Treasury and Federal Reserve have fully examined this 
question and made appropriate provisions will be a part of our 
oversight question. And given that TARP itself is due to expire 
in October of this year, we raise a question about how much 
TARP can do to address these challenges.
    We also note that commercial real estate poses particular 
threats to small and midsize banks, which are often the key 
sources of loans for commercial projects in their communities. 
Given these smaller banks have never faced stress tests, how 
likely are smaller financial institutions to survive a 
significant shock in commercial real estate? How can the 
Treasury's programs, which until now have focused on supporting 
the very largest financial institutions, provide adequate 
support to smaller banks? What are the implications for the 
FDIC if the rate of bank failures, already high, starts to rise 
at a steeper rate?
    These are hard questions, and we are grateful to be joined 
by experts who can begin to find the answers, including 
government experts representing the Federal Reserve, the FDIC, 
as well as local bankers and investors. We thank you all for 
your willingness to share your perspectives and we look forward 
to your testimony.
    The Chair calls on Mr. Atkins, if you'd like to make some 
opening remarks.
    [The prepared statement of Chair Warren follows:]
    [GRAPHIC] [TIFF OMITTED] 55522A.001
    
    [GRAPHIC] [TIFF OMITTED] 55522A.002
    
STATEMENT OF PAUL ATKINS, MEMBER, CONGRESSIONAL OVERSIGHT PANEL

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

    STATEMENT OF DAMON SILVERS, DEPUTY CHAIR, CONGRESSIONAL 
                        OVERSIGHT PANEL

    Mr. Silvers. Thank you, Madam Chair. Good morning. Like my 
fellow panelists, I'm very pleased to be here in Atlanta and 
grateful for the help and the presence here today of Atlanta's 
mayor, Kasim Reed. I also want to extend my appreciation again 
for the assistance of the office of Congressman John Lewis, one 
of the people in public life whom I admire most.
    The Emergency Economic Stabilization Act of 2008, which 
gave rise to TARP, sought to address both the immediate and 
acute crisis that ripped world markets in October of 2008 and 
the deeper causes of that crisis in the epidemic of residential 
foreclosures. The purpose of the Act was not to stabilize the 
financial system for its own sake, but to do so in order that 
the financial system could play its proper role of providing 
credit to Main Street. Since this panel began its work a little 
more than a year ago, we have continued to ask three questions. 
First, is TARP working effectively to stabilize the financial 
system? Secondly, is that same financial system, as a result of 
TARP, doing its job of providing credit to Main Street, and, 
three, is TARP functioning in a way that is fair to the 
American people?
    Today's hearing on the impact of difficulties in the 
commercial real estate market is really about all three of 
these questions. There is three-and-a-half trillion dollars in 
U.S. commercial real estate debt. Five hundred billion of that 
debt will mature in the next few years. There was clearly a 
bubble in the commercial real estate values prior to 2008. 
We've heard already a fair amount about that. But it is not 
clear the extent of the bubble. Meaning it's not clear how much 
of those--of those values were unsustainable and how much was 
real. As a result, the return of commercial real estate prices 
to levels that are supported by real estate fundamentals is a 
potential source of systemic risk.
    For example, recently Bank of America was allowed to repay 
TARP funds in a manner that weakened its Tier 1 Capital ratios. 
Meanwhile, here in Atlanta, Bank of America is dealing with 
large commercial real estate problem loans in properties like 
Streets of Buckhead, and it's quite unclear what the outcome in 
those circumstances is going to be.
    In addition, it is unclear whether the financial system as 
a whole is healthy enough to provide financing for properties 
even when they are properly priced, let alone financing for new 
development.
    Finally, there is the question of the impact of the decline 
on commercial real estate values on smaller banks. This goes to 
the fairness point part of our mission. In Georgia there have 
been 30 bank failures since August of 2008. These banks have 
gone through the FDIC resolution process resulting, insofar as 
I know, their disappearance as independent entities.
    The contrast between the impact of the financial crisis on 
small banks and on very large failing financial institutions, 
that received both extraordinary TARP assistance and assistance 
from the Federal Reserve System, appears to raise fundamental 
issues of fairness.
    I hope in this hearing we will address these questions, 
and, in the process, help the Panel to advise the Treasury 
Department and Congress as to what steps, if any, need to be 
taken in the area of commercial real estate. I do not believe 
it is either desirable or possible to prevent commercial real 
estate prices from returning to sustainable levels. The goals 
here should be to ensure that the collapse of the bubble in 
commercial real estate has little, if any, systemic impact, 
that financing remains available for both existing property and 
new construction that is rationally priced, and that the 
federal government conducts itself in this area in a manner 
that is fair to both small and big financial institutions and 
to communities where commercial real estate financing is vital 
to maintaining community vitality and jobs.
    In reviewing the materials our staff helpfully provided for 
this hearing and the testimony of our witnesses, I cannot help 
but be struck by the contrast between the bonuses being 
announced this week by the institutions the public rescued on 
Wall Street and the unabated tide here in Atlanta and across 
this country of unemployment, residential and commercial 
foreclosures, and jobs that, not only are lost, but not being 
created.
    President Obama has rightly asked the big banks to help pay 
for TARP, but more needs to be done to restore fairness to our 
economy and financial system. I hope that this hearing can 
provide concrete ideas we can bring back to the Treasury and 
Congress for how TARP can be managed to be part of the solution 
the Mayor referred to earlier for communities like Atlanta. 
Solutions that lead the financial system to play in its proper 
role as a creator and not a destroyer of jobs and communities. 
Thank you.
    [The prepared statement of Mr. Silvers follows:]
    [GRAPHIC] [TIFF OMITTED] 55522A.003
    
    [GRAPHIC] [TIFF OMITTED] 55522A.004
    
    Chair Warren. Thank you, Mr. Silvers. Mr. McWatters.

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

    Mr. McWatters. Thank you, Professor Warren. I very much 
appreciate the attendance of the distinguished witnesses that 
we have today, and I look forward to hearing your views. In 
order to suggest a solution to the challenges currently facing 
the commercial real estate or CRE market, it is critical that 
we thoughtfully identify the sources of the underlying 
difficulties. Without a proper diagnosis, it is likely that we 
may craft an inappropriately targeted remedy with adverse, 
unintended consequences. Broadly speaking, it appears that 
today's CRE market is faced with both an oversupply of CRE 
facilities and an undersupply in prospective tenants and 
purchasers.
    In my view, there has been an unprecedented collapse of 
demand for CRE property, and many potential tenants and 
purchasers have withdrawn from the CRE market, not simply 
because rental rates and purchase prices are too high, but 
because the business operations do not presently require 
additional CRE facilities.
    Over the past few years, while CRE developers have 
constructed new facilities, the end users of such facilities 
have suffered the worst economic downturn in several 
generations. Any posited solution to the CRE problem that 
focuses only on the oversupply of CRE facilities to the 
exclusion of the economic difficulties facing the end users of 
such facilities appears unlikely to succeed. The challenges 
confronting the CRE market are not unique to that industry, 
but, instead, are indicative of the systemic uncertainties 
manifest throughout the larger economy.
    In order to address the oversupply of CRE facilities, 
developers and their creditors are currently struggling to 
restructure and refinance their portfolio loans. In some 
instances, creditors are acknowledging economic reality and 
writing their loans down to the market with, perhaps, the 
retention of an equity participation right. In other cases, 
lenders are merely kicking the can down the road by refinancing 
problematic credits on favorable terms at or near par, so as to 
avoid the recognition of losses and the attendant reductions in 
regulatory capital.
    While each approach may offer assistance in specifically 
tailored instances, neither addresses the underlying economic 
reality of too few tenants and purchasers for CRE properties. 
Until small and large businesses regain the confidence to hire 
new employees and expand their business operations, it is 
doubtful the CRE market will sustain a meaningful recovery. As 
long as business persons are faced with the multiple challenges 
of rising taxes, increasing regulatory burdens, enhanced 
political risks associated with unpredictable governmental 
interventions in the private sector, as well as uncertain 
healthcare and energy costs, it is unlikely that they will 
enthusiastically assume the entrepreneurial risk necessary for 
protracted economic expansion and a recovery of the CRE market.
    It is fundamental to acknowledge that the American economy 
grows one job and one consumer purchase at a time, and that the 
CRE market will recover one lease, one sale, and one financing 
at a time. With the ever expanding array of less than friendly 
rules, regulations, and taxes facing business persons and 
consumers, we should not be surprised that businesses remain 
reluctant to hire new employees, consumers remain cautious 
about spending, and the CRE market continues to struggle.
    The problems presented by today's CRE market would be far 
easier to address if they were solely based upon the mere 
oversupply of CRE facilities in certain well-delineated 
markets. In such event, a combination of restructurings, 
refinancings, and foreclosures would most likely address the 
underlying difficulties. Unfortunately, the CRE market must 
also assimilate a remarkable drop in demand from prospective 
tenants and purchasers with CRE properties who are suffering a 
reversal in their business operations and prospects.
    In my view, the Administration could promptly jumpstart the 
CRE market as well as the overall economy by sending an 
unambiguous message to the private sector that it will not 
directly or indirectly raise taxes or increase the regulatory 
burden of CRE participants and other business enterprises. 
Without such express action, the recovery in the CRE market 
will most likely proceed at a sluggish and costly pace that may 
foreshadow the Secretary's allocation of additional TARP funds 
to financial institutions that hold CRE loans and commercial 
mortgage-backed securities.
    Thank you for joining us today, and I look forward to our 
discussion.
    [The prepared statement of Mr. McWatters follows:]
    [GRAPHIC] [TIFF OMITTED] 55522A.005
    
    [GRAPHIC] [TIFF OMITTED] 55522A.006
    
    Chair Warren. Thank you, Mr. McWatters. Superintendent 
Neiman.

 STATEMENT OF RICHARD NEIMAN, MEMBER, CONGRESSIONAL OVERSIGHT 
                             PANEL

    Mr. Neiman. Thank you. I am very pleased to be here in 
Atlanta. Atlanta has a special meaning to me. I went to law 
school here at Emory. I even started my career in bank 
regulation here in Atlanta as an intern for the regional office 
of the control of the currency.
    This hearing continues the Panel's commitment to issues 
around it, credit availability, community banking, and 
commercial real estate. It's been six months since our first 
hearing on these issues, which was held in New York City, and 
it is the right time to revisit them.
    New York has a unique concentration of commercial real 
estate properties. But, as the recession has lingered, regional 
business hubs, such as Atlanta, are under increasing pressure 
as well. Atlanta, in particular, experienced a surge in 
commercial real estate development during the boom years. And 
from my days here in Atlanta, I vividly recall--in fact, I even 
worked at the Hyatt Regency in the sky bar that went around the 
restaurant, around and around. You could see the entire city, 
and now you're looking probably at the thirtieth floor of the 
building next to you.
    Now high vacancy rates for office space here are 
compounding as a fallout from the financial crisis. 
Reevaluating the growing risks in this sector is a top 
priority, and that is why commercial real estate is the subject 
of the Panel's first hearing in the New Year. Commercial real 
estate is not a boutique lending niche of importance only to a 
subset of lenders and borrowers. Commercial real estate impacts 
every community on multiple levels, so understanding this 
sector is an important aspect of stabilizing our national 
economy.
    When people think of commercial real estate they often just 
think of properties, such as office buildings, shopping malls, 
and hotels, but commercial real estate also includes 
multifamily and affordable housing units, from rental apartment 
complexes to condos. This is the financing that provides 
accommodation for jobs, for conducting business, and for 
living.
    I know that we will hear a lot today about the risk that 
troubled commercial real estate loans present for bank balance 
sheets, and that is certainly a critical consideration, 
particularly for me, as a bank regulator. But financial 
stability begins and ends with the well-being of our 
neighborhoods, and our families, and our national economy. It 
is the health of our communities that is our ultimate concern.
    For multiple family buildings in particular, there is a 
concern that the property's condition will deteriorate as the 
owner's cash flow is diverted to making debt payments. Further, 
tenants who pay their rent on time can find themselves homeless 
because their landlord defaulted on the underlying commercial 
mortgage.
    In New York we are developing progressive solutions that 
can serve as models for stabilizing multifamily housing units 
nationwide. Foremost is Governor Patterson's 2009 mortgage 
reform legislation, which provides new protections for renters 
when their landlord is in foreclosure. Our state housing 
finance agency is also developing a pilot program to convert 
unused luxury units to affordable housing.
    There is still another way in which commercial real estate 
intersects with people's daily lives, and that is the impact of 
community banks. Community banks not only provide a 
proportionately large share of commercial real estate 
financing, they also are key sources of credit to small 
businesses, an engine of growth for job creation. We have seen 
growing numbers of smaller banks fail recently and anticipate 
that this trend will continue. These small bank failures, which 
could be increasingly driven by commercial real estate 
defaults, creates holes in our communities. Where there was 
once a flourishing center for responsible hometown lending, 
there can be a vacuum. This means less credit may be available 
for small businesses as well as for consumer lending.
    The meltdown in residential subprime mortgages caught many 
by surprise. But with commercial real estate we have more 
advance warning of the scope and the magnitude of the 
developing problem. It is my hope and intent that today's 
hearing will not only assess the magnitude of the problem, but 
will also explore potential market-based and public policy 
solutions. I look forward to your testimony and to your 
innovative ideas. Thank you.
    [The prepared statement of Mr. Neiman follows:]
    [GRAPHIC] [TIFF OMITTED] 55522A.007
    
    [GRAPHIC] [TIFF OMITTED] 55522A.008
    
    Chair Warren. Thank you Superintendent Neiman. We call our 
first panel now. Our first panel, while they are taking their 
places, I will go ahead and introduce them. Our first panel of 
witnesses today will consist of government banking regulators 
from the Federal Reserve and the Atlanta office of the FDIC. 
And I'm pleased to welcome Jon Greenlee, who is the Associate 
Director of the Division of Banking and Supervision for the 
Board of Governors of the Federal Reserve System. Thank you, 
Mr. Greenlee. And Doreen Eberley, the Acting Director of the 
Atlanta Regional Office of the FDIC.
    I am going to ask each of you if you would limit your oral 
remarks to five minutes, but we have read your testimony and it 
will become part of the written record of this hearing. So with 
that, I would like to present you Mr. Greenlee for five 
minutes.

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

    Mr. Greenlee. Thank you, Chair Warren, and members Neiman, 
Silvers, Atkins and McWatters. I appreciate the opportunity to 
appear before you today to discuss trends in the commercial 
real estate sector and other issues related to the condition of 
the banking system. Although conditions in the financial 
markets continue to show improvement, significant stress 
remains and borrowing by business and households sectors remain 
weak. The condition of the banking system remains far from 
robust, loan quality continues to deteriorate across many asset 
classes because of the economic downturn, increases in 
unemployment, and weaknesses in real estate markets. As a 
result, many banking organizations have experienced significant 
losses and are challenged by poor earnings and concerns about 
capital adequacy.
    In Georgia, the performance of banking organizations has 
also deteriorated. Like their counterparts nationally, banks in 
Georgia have seen a steady rise in non-current loans and 
provisions for loan losses, which have weighed on bank earnings 
and capital, and 30 banks have failed in the state since the 
turmoil in financial markets first emerged.
    Substantial financial challenges remain, and, in 
particular, for those banking organizations that have built up 
unprecedented concentrations in commercial real estate loans, 
given the current strains in the real estate markets.
    From a supervisory perspective, the Federal Reserve has 
been focused on CRE exposures for some time. In 2006 we led the 
development of interagency guidance on CRE concentrations to 
highlight the importance of strong risk management over these 
types of exposures.
    On October 30th of last year the federal and state banking 
agencies, including my colleagues at the FDIC, issued guidance 
on CRE loan restructuring and workouts. This guidance is 
designed to address concerns that examiners may not always take 
a balanced approach to the assessment of CRE loans. One of the 
key messages in the guidance was that for renewed or 
restructured loans in which borrowers who have the ability to 
repay their debt according to reasonably modified terms, will 
not be subject to examiner criticism.
    Consistent with our longstanding policies, this guidance 
supports balanced and prudent decision-making with respect to 
loan restructuring and timely recognition of losses. At the 
same time, our examiners have observed incidents where banks 
have been slow to acknowledge declines in commercial real 
estate cash flows and collateral values in their assessment of 
potential loan repayment.
    As noted in the guidance, the expectation is that the bank 
should restructure CRE loans in a prudent manner and not simply 
renew a loan to avoid a loss recognition.
    Immediately after the release of this guidance, the Federal 
Reserve developed an enhanced examiner training program and we 
have engaged in outreach with the industry to underscore the 
importance of the principles laid out in that guidance.
    Finally, in late November, the Federal Reserve's TALF 
program financed the first issuance of CMBS since mid-2008. 
Investor demand was high. And in the end, non-TALF investors 
purchased almost 80 percent of the TALF eligible securities. 
Shortly thereafter, two additional CMBS deals without TALF 
support came to market and were positively received by 
investors. Irrespective of these positive developments, market 
participants anticipate that CMBS delinquency rates will 
continue to increase in the near term.
    In summary, it will take some time for the banking industry 
to work through this current set of challenges and for the 
financial markets to fully recover. The Federal Reserve is 
committed to working with Congress and the other banking 
agencies to promote the concurrent goals of fostering credit 
availability and a safe and sound banking system. Accordingly, 
we thank you for holding this important hearing, and I look 
forward to your questions. Thank you.
    [The prepared statement of Mr. Greenlee follows:]
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    Chair Warren. Thank you, Mr. Greenlee. Ms. Eberley.

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

    Ms. Eberley. Good morning Chair Warren and members of the 
panel. I appreciate the opportunity to testify on behalf of the 
Federal Deposit Insurance Corporation concerning the condition 
of the commercial real estate market in Atlanta and its impact 
on insured institutions' lending.
    As you noted in your invitation letter, the real estate 
market in the Atlanta metropolitan area has been hard hit. My 
testimony will describe the factors that led to the 
difficulties in the Atlanta housing market and the manner in 
which those difficulties have translated to high levels of loan 
losses and bank failures. I will discuss weaknesses we have 
started to see in the Atlanta area market for other types of 
real estate, such as office, retail, hotel, and industrial 
properties. And, finally, I'll describe the supervisory actions 
regulators are taking to address these risks.
    The Atlanta area was ranked first in the nation in single-
family home construction each year from 1998 to 2005. In 
response to an increased demand for housing stock, residential 
development activity increased and many FDIC-insured 
institutions headquartered in the Atlanta area exhibited rapid 
growth in their acquisition, development, and construction or 
ADC portfolios. This growth resulted in significant 
concentrations in ADC loans. The FDIC monitored the growth of 
ADC loans in the Atlanta area as it occurred and attributed the 
growth to local institutions meeting the housing needs of an 
increasing population. What was not really apparent, however, 
was the increasing volume of subprime and nontraditional 
mortgage originations in the market. The increased availability 
of these types of mortgages turned out to be a significant 
factor driving housing demand.
    Demand for vacant developed lots in the Atlanta market 
collapsed shortly after subprime and nontraditional mortgage 
originations were sharply curtailed in 2007. The resulting 
imbalance between supply and demand has led to deterioration in 
the performance of residential development loans, which 
comprised the bulk of the ADC portfolios of Atlanta area 
financial institutions. The impact of this deterioration has 
been magnified by the disproportionately high concentration of 
ADC loan lending. At year end 2007, Atlanta-based institutions 
reported a weighted average ADC concentration that was nearly 
three times higher than that reported by similar institutions 
in other metropolitan areas. Losses experienced by Atlanta 
banks on ADC portfolios have also been higher than the national 
average, and poorly performing portfolios of ADC loans have 
been a significant factor in recent bank failures. The 25 
institutions from the Atlanta area that have failed since the 
beginning of 2008 reported a weighted average ADC concentration 
a year before failure of 384 percent of total capital.
    While Atlanta's residential development market remains 
strained with reports of a ten-year supply of vacant developed 
lots, weaknesses are now emerging in the Atlanta area market 
for other categories of real estate, such as office, retail, 
hotel and industrial properties. Atlanta ranks among the top 
ten markets, in terms of vacancy rates across these categories. 
As a result, performance of these loans has started to 
deteriorate.
    Contrary, to what we've seen in ADC portfolios, loss rates 
and non-performing rates experienced by Atlanta institutions 
for the largest category of commercial real estate loans--those 
that have non-farm, non-residential property as collateral--are 
comparable to national averages. It's not greater. Also, 
Atlanta area financial institutions are proportionately less 
exposed to this segment of the market than it appears in other 
metropolitan areas.
    In response to the risks in the Atlanta and other 
commercial real estate markets, the FDIC has maintained a 
balanced supervisory approach. We identify problems and seek 
corrections when there are weaknesses, while remaining 
sensitive to the economic and real estate market conditions and 
the efforts of bank management. Through industry guidance we 
have encouraged banks to continue making loans available to 
credit-worthy borrowers and to work with mortgage borrowers 
that have trouble making payments; we have required banks to 
have policies and practices in place to ensure prudent 
commercial real estate lending; and we have encouraged prudent 
and pragmatic commercial real estate workouts within the 
framework of financial accuracy, transparency, and timely loss 
recognition.
    Finally, we believe that financial reform proposals 
currently under consideration can play a role in mitigating the 
types of risks that have led to significant losses in the 
Atlanta market. For example, the FDIC believes that 
consideration of a borrower's ability to repay is a fundamental 
consumer protection that should be enforced across the lending 
industry. Establishment of such a standard at the federal level 
should eliminate regulatory gaps between insured depository 
institutions and non-bank providers of financial products and 
services by establishing strong, consistent consumer protection 
standards across the board.
    In addition, we support the creation of a process to 
oversee systemic risk issues, develop new prudential policies, 
and mitigate developing systemic risks. With the benefit of 
hindsight, it's fair to say that during the years leading up to 
the crisis, systemic risks were not identified and addressed 
before they were realized as widespread industry losses. The 
experience in Atlanta is illustrative. During the years of 
rapid ADC loan growth local financial institutions and their 
supervisors did not fully appreciate the growing risks posed by 
the availability of subprime and nontraditional mortgage 
products. Examples such as this underscore the benefit of 
monitoring systemic risks to assess emerging risks using a 
system-wide prospective.
    [The prepared statement of Ms. Eberley follows:]
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    Chair Warren. Ms. Eberley, that's all for now.
    Ms. Eberley. Thank you.
    Chair Warren. Okay. Thank you very much.
    So we're going to see if we can go through a round of 
questions here. What I'd like to start with, since we have two 
people who supervise the regulators in front of us, is I'd like 
to talk a little and ask them a bit about the role of the 
regulators in the run up to this crisis. The rules governing 
lending, obviously, are going to be critical in understanding 
the problem and trying to shape some kind of solution.
    Now, as I understand it, 2005, 2006 there was a significant 
deterioration in bank underwriting standards. In 2006, there 
was an interagency guidance concerning risks to banks having 
large concentrations of commercial real estate, and the banks 
complained about this guidance because it would have restricted 
the amount of concentration that they could have had in 
lending, and, as a result, the guidance was changed. The 
regulations were, in fact, weakened so that there was less 
regulatory oversight.
    So what I'd like to start with is a question about the role 
that the regulators played in the run-up to this crisis and 
maybe a grade for how the regulators did. Mr. Greenlee.
    Mr. Greenlee. Thank you for that question. From our 
perspective, commercial real estate in particular, is an area 
that we've been focused on for quite some time. We did identify 
building concentrations in the earlier part of the decade, and 
we got together with the other agencies to try to find a way to 
make sure that as banks were continuing to expand in that area 
and that they were managing the risk associated with commercial 
real estate appropriately. And we issued the guidance in 2006 
that you are referencing.
    Chair Warren. But the guidance, that was weakened when the 
banks complained.
    Mr. Greenlee. We were trying to balance our guidance, in 
terms of not, you know, overlaying too stringent of 
requirements on banks, but allowing them to pursue their 
business plans.
    Chair Warren. So in 20/20 hindsight----
    Mr. Greenlee. At the same time make sure----
    Chair Warren [continuing]. How has that worked out for us?
    Mr. Greenlee. I think in 20/20 hindsight, you look back, 
and, as we have mentioned in both our testimonies, the 
commercial real estate concentrations have become a significant 
problem.
    Chair Warren. What I'm asking about though is the role of 
the regulators in those concentrations. The regulators had the 
power to make sure that this didn't happen. What went wrong?
    Mr. Greenlee. Our guidance was really aimed at trying to 
get the banks to manage those concentrations in a more 
effective way. Particularly through the use of stress testing 
to gain a broader understanding of what potential difficulties 
in the marketplace could mean to overall bank solvency, and to 
have the banks take the responsibility for managing that risk 
in a prudent and effective way.
    Chair Warren. Let me switch then. Let me go to the current 
context, since we're going to be pressed on time. To what 
extent did the banks, the current banks, recognize their 
commercial losses? Are the losses now acknowledged on the books 
of the banks? Are the books of the banks reliable on the 
question of commercial real estate losses, Mr. Greenlee?
    Mr. Greenlee. One of the purposes of the guidance that we 
issued last October, as I mentioned in my statement, was that 
we had come across incidents where banks were slow to recognize 
losses. In some instances, banks had renewed and restructured 
loans in ways that may not have increased the ability of that 
borrower to repay the loan in full. So, in part, we were trying 
to send a message to the industry too that they need to 
recognize their losses in a timely manner. Our----
    Chair Warren. My question is how much confidence do you 
have that they've done that?
    Mr. Greenlee. For our examiners that is a main focus of 
their onsite examination process. There are a few outliers, our 
supervisors are addressing them and making sure that the banks 
are taking losses as appropriate.
    Chair Warren. I don't think I'm hearing an answer though. 
Are you confident that that has now been accomplished, that the 
books accurately reflect the commercial real estate losses?
    Mr. Greenlee. As commercial real estate markets continue to 
be under pressure, I think there could be more losses. Our 
examination process is designed to----
    Chair Warren. But you feel confident that they're at least 
current today?
    Mr. Greenlee. I think in terms of individual, specific 
banks there may be some question. As such, we continue our 
supervisory efforts to make sure they are recognizing their 
losses. It's a very hard question to kind of answer in a broad 
way, because it is very institution-specific as to whether or 
not the banks have good risk management and loss recognition 
practices.
    Chair Warren. Ms. Eberley, I'm sorry, I didn't mean to 
ignore you during this.
    Ms. Eberley. That's okay.
    Chair Warren. We have such short periods of time. Would you 
like to add to either one of those questions about the role of 
the regulators or where we stand?
    Ms. Eberley. Yes, I will. To the second question, I think 
that the point that Mr. Greenlee is making is an appropriate 
one, that this is an ongoing process for financial 
institutions. They're required to take a look at their loans on 
a regular basis as they do their call reports to the federal 
regulators. Their financial statements every quarter have to be 
an accurate reflection of their financial condition.
    Chair Warren. So you're confident in the books now?
    Ms. Eberley. I wouldn't say that the losses are over, if 
that's your question.
    Chair Warren. That's not my question. My question is 
whether or not the books currently reflect appropriately the 
risks that these banks face?
    Ms. Eberley. I think, yes, generally they do. There are 
outliers, but generally they do.
    Chair Warren. Thank you. Mr. Atkins.
    Mr. Atkins. Okay. Thank you very much. Let's circle back 
around to that. I think that was a good question with respect 
to the guidance back in the middle part of this decade. When it 
came out, and I guess I am on more of a security side than a 
banking side, but I assume that basically the purpose of the 
guidance was to call attention to and to impact management to 
make sure that they were looking for and taking into account 
various types of disaster scenarios and things like that. So, 
just to follow up on the question, when that guidance was 
revised, in what way was it revised? And did it have any impact 
with respect to how banks were treating their loans or 
undertaking new transactions?
    Mr. Greenlee. When we issued the guidance, we did put it 
out for public comment, and, as you noted, we got a lot of 
comments back from the industry and other participants. And, as 
we do with everything we put out for public comment, we tried 
to take those responses into account as we worked toward the 
final issuance of the guidance. One chief concern that many 
people expressed at that time was, again, concern that their 
business plans and the lending that they were primarily engaged 
in, commercial real estate. There were also concerns about 
effects on local economies and profitability of the institution 
as a whole. As regulators, we try to strike a balance to make 
sure that the banks understand what the downside scenarios are, 
that they have thought about that, in terms of their capital 
planning, and conducted proper stress testing so that the banks 
understand the capital impact. We also tried to ensure that 
they understand the need to have effective processes in place 
to manage the risks that they're taking on in their 
institutions.
    Mr. Atkins. Ultimately, it was their decision and not the 
regulators' decision, and we have had sort of a hundred or a 
thousand-year type of storm. But looking forward at current 
types of activity in the marketplace, obviously, it's very far 
down. And one of the issues that gets raised over and over is 
how bank examiners might be dampening the ability or 
willingness of bankers to undertake new loans. And so I salute 
the the guidance, the training, and the other things that you 
have been doing, because, as I know from personal experience 
from the early 1990s when we went through a similar thing, the 
regulators are not always as responsive. But it sounds like you 
are trying.
    So I was wondering do you have any assessment of how 
effective that's being, because, obviously, we don't want to 
have the dreaded ``F'' word of forbearance. Do you perceive 
that examiner scrutiny is depressing the willingness of bankers 
to be active in this marketplace?
    Ms. Eberley. I don't believe so. I think the greater 
constraints are capital constraints that financial institutions 
are operating under because of the volume of troubled assets 
that they have on their books, and, additionally, liquidity 
concerns. I think those are the two greatest constraints to 
institutions being able to lend.
    Mr. Atkins. With respect to demand then--well the liquidity 
constraints and that sort of thing--but also the demand from 
business folks who are looking to take out loans. What we're 
seeing, of course is a depression of the demand. I guess we'll 
hear more about that later. But are you seeing that nationwide 
as a whole or is it regionally focused?
    Mr. Greenlee. From what we're hearing and observing, the 
demand for credit is down considerably. Loans to businesses and 
consumers alike have been dropping in the banking system. We 
have done a lot of work and we continue to try to better 
understand, the supply and demand effects of credit. We hear 
stories just like you do that the examiners perhaps are 
impeding credit being made available to borrowers. We follow up 
on those things. And we have issued supervisory statements, 
such as the November 2008 statement encouraging banks to make 
prudent loans. And in the CRE guidance, it is especially 
important in terms of the effect it has on small businesses, 
because a lot of small business loans are secured by the real 
estate that the business owner owns or the business owns. So we 
were trying to think about that as well.
    Mr. Atkins. Well, my time is up, so thank you.
    Chair Warren. Thank you. Mr. Silvers.
    Mr. Silvers. Thank you. I'll try to continue the thread 
here. We are looking at this ultimately from the perspective of 
our responsibilities and the relationship to TARP. What 
actions, if any, should or might be taken with TARP funds or 
with the powers that the bill passed by Congress in the crisis 
gives the Treasury to address commercial real estate? And, in 
order to begin to do that, we need to begin by asking, ``What's 
the problem here?'' You mentioned--I think each of you 
mentioned--liquidity as a potential issue and you mentioned 
capital, the capital constraints in financial institutions. 
Those seem to be two possible diagnoses of, I think, what your 
testimony and the testimony of our witnesses that will follow 
you suggest is an absence of commercial real estate finance in 
this market and, to a significant degree, nationwide.
    So can you comment on the relevant importance of those two 
issues to start off?
    Mr. Greenlee. In terms of looking at the banks that we 
supervise and particularly the local community banks that 
specialize and have concentrations in commercial real estate, I 
agree with my colleague that the capital constraints, the 
liquidity concerns that they have, are a significant factor in 
their willingness and ability to continue to make commercial 
real estate loans or loans in general. We also try to think 
about the broader marketplace, and the CMBS market is an 
important provider of commercial real estate financing. And, as 
you know, we expanded the TALF program for CMBS to provide some 
stability to that market and try to bring some investors back 
in. That has actually worked. We had one recent CMBS issuance 
of TALF, and then following that, two more were issued without 
TALF financing. So the broader CRE liquidity in the marketplace 
is an important consideration. And it also gets to investors' 
willingness to take on this risk, and how they're pricing it, 
and how they see the future for real estate prices.
    Mr. Silvers. Ms. Eberley.
    Ms. Eberley. I would say that capital is the most 
significant concern facing financial institutions here in the 
Atlanta area, with liquidity as the second.
    Mr. Silvers. Let's focus on capital for a moment. I must 
say, I am inherently suspicious of complaints about liquidity, 
the reason being that my liquidity crisis is your belief that I 
am deluding myself, as to the value of the asset I'm trying to 
sell. So I want to focus on capital.
    If that's the major problem, that our financial 
institutions are undercapitalized, that would suggest that 
perhaps--Ms. Eberley, you raised the issue of trying to get 
assets off the books. Is that a plausible solution, meaning if 
assets are moved off of bank books at fair--at rational prices 
today, would that solve a liquidity crisis, or, I mean, solve 
the capital crisis or would it exacerbate it?
    Ms. Eberley. I would say it would exacerbate it. The 
institutions need the capital to be able to sell loans at 
prices that the market will pay. What they are doing now is 
they are recognizing market value declines as they occur, 
typically on a quarterly basis, since they file their financial 
statements with the regulators, and--and it erodes capital over 
time.
    Mr. Silvers. And so now----
    Ms. Eberley. And economic recovery would also help.
    Mr. Silvers. Yes. And I share the comments, the views of my 
colleagues, that all these things are driven by larger economic 
forces. But can you all comment on the relative capital 
strength as you perceive in this marketplace as between 
community banks, larger regional institutions, and national 
players? Is there a capital problem across the board or is this 
limited to one or more segments of the banking industry?
    Ms. Eberley. I'll speak to the community banks. They came 
into this crisis with very strong capital levels compared to 
historic norms, very strong capital, which has been fortunate.
    Mr. Silvers. So you would say that, in fact, community 
banks are not where the capital problem resides.
    Ms. Eberley. No. I said they came into the crisis with very 
strong capital. It's----
    Mr. Silvers. Finish the thought then.
    Ms. Eberley. Yes. They definitely are facing capital 
pressures now. It would have been far worse had they not come 
in with the strong capital levels that they did at the 
beginning of the crisis.
    Mr. Silvers. And then can you comment--I know that you 
don't regulate the larger institutions directly, but--but you 
certainly pay attention to them, given the fact that you insure 
them. Can you comment on the other segments?
    Ms. Eberley. I'd like to defer to Mr. Greenlee to talk 
about capital----
    Mr. Silvers. That's fine.
    Ms. Eberley [continuing]. With the larger institutions.
    Chair Warren. We're going to have to be short. We're over 
time.
    Mr. Greenlee. I would just quickly say that part of the 
supervisory stress test we conducted last Spring, the 
Supervisory Capital Assessment Program (SCAP), was designed to 
ensure that the largest institutions had an adequate capital 
base to weather an adverse economic scenario. And they have 
been able to raise significant amounts of capital since that 
time.
    Mr. Silvers. So they are lending freely right now in this 
market?
    Mr. Greenlee. They are making loans, but the loan balances 
overall are declining.
    Chair Warren. Mr. McWatters.
    Mr. McWatters. Thank you. You know, I've heard a lot of 
problems. We have a lot of problems. But if you had to 
summarize in a one-page memo to your immediate supervisor, who 
asked you, how do I orchestrate a soft landing of the CRE 
market, what would you say and why would you say it?
    Mr. Greenlee. I think that's an interesting question. I 
would say the one thing that we do know is that the broader 
economic environment, the recession and increases in 
unemployment have been a significant factor in commercial real 
estate prices falling, and vacancies rising. In terms of trying 
to get prices to stabilize or potentially recover, the economic 
environment is going to be a key factor.
    Ms. Eberley. I think what the regulators have already done 
is the most important step that we can make, which is to 
encourage institutions to engage in reasonable workouts of 
loans with borrowers that have the ability to pay. Perhaps not 
make the same payment they were making before, but the ability 
to continue making payments to the institution at a reduced 
basis. Loans can be reworked, restructured, partially charged 
down, and the inter-agency guidance addresses all of the 
options and specifically says that regulators will not 
criticize bank management for engaging in that sort of 
activity.
    Mr. McWatters. So it's a bit of a kick the can down the 
road with the expectation or, with the hope, that prices will 
recover, and that prices will recover when more tenants are 
competing for the properties, more purchasers are competing for 
the properties. And that will only happen when their underlying 
businesses become stronger.
    Ms. Eberley. I wouldn't call it a kick the can down the 
road. I would call it a recognizing the economic reality of 
today. Loans are going to have to be written down. There will 
have to be some partial write downs, and reworking, and 
restructuring, but it doesn't have to be a complete loss. There 
are ways to move forward.
    Mr. McWatters. Okay. Do you see a lot of simple refinancing 
at existing prices with the expectation that prices will 
recover for the property?
    Ms. Eberley. Do you mean just rolling over a loan and----
    Mr. McWatters. Rolling it without writing down and 
impairing regulatory capital. Taking losses in the light which 
effects share value and so forth.
    Ms. Eberley. We do occasionally. And there's two ways that 
that happens. One way is with a borrower that has the ability 
to continue servicing debt, and making payments, and amortizing 
a credit. Another way is--is where an institution would just 
refinance the loan, set a payment date in the future, and say 
you'll pay us then, and that's not acceptable.
    Mr. McWatters. Okay. Okay. How about an update on TALF and 
PPIP? Where is that going and what's the future?
    Mr. Greenlee. I can speak to TALF. My understanding is that 
the last Federal Open Markets Committee (FOMC) indicated that 
the TALF programs will be winding down on their scheduled 
dates. But the FOMC also reserved the right to modify that 
schedule if conditions warrant it is deemed appropriate.
    Ms. Eberley. In terms of PPIP, there haven't been any 
Treasury or taxpayer funds used to support a PFIF-type 
partnership. There have been for the partnerships form basis 
supported by FDIC funds or guarantees. And we continue to work 
on ways to refine the program.
    Mr. McWatters. I guess one more question. Every time I 
speak with someone who wants to refinance or wants to borrow 
money, they say they can't refinance or they can't borrow. But 
what I hear from a lot of regulators and a lot of other people 
is, ``Yeah, it's happening.'' A lot of banks are refinancing. 
Where is the disconnect? And what's happening in the 
marketplace? If I have an underwater property that I want to 
refinance, how difficult is it? I mean is it actually being 
done?
    Mr. Greenlee. In my discussions with bankers, I hear that 
it is being done when they can do it in a prudent and effective 
way, when a borrower has the willingness and ability to make 
payments on a restructured basis.
    Ms. Eberley. My discussions with examiners would indicate 
the same, that it is being done.
    Mr. McWatters. Okay. That's all.
    Chair Warren. Commissioner Neiman.
    Mr. Neiman. I'd like to follow up on the CRE guidance and 
regulatory accounting, because I think there is a lack of full 
understanding by the public and the media, as to the purpose 
and the objectives of the CRE guidance. You know, sometimes 
people refer that it provides the ability for institutions to 
extend and pretend, because it does not automatically consider 
an underwater loan to be impaired, requiring that it be written 
down, if there is an expectation of repayment.
    Could you elaborate on why regulators put first priority on 
loan performance and the expectation of being repaid according 
to contract terms compared to with collateral? I think it would 
be helpful just to go into that in a little more detail.
    Ms. Eberley. Certainly. I think that first and foremost, 
when examiners are looking at loans and financial institutions, 
the very first focus is on a borrower's ability to repay the 
debt. We look to the borrower. We expect financial institutions 
to look to the borrower, not to look to the sale of collateral. 
Ability to repay is the fundamental tenet of lending that we 
expect in community institutions.
    Mr. Neiman. And would you agree that loans that were 
paying, the fact that the loan is being held to maturity, if 
they were required to mark these loans based on collateral, you 
would have a great deal of volatility in those balance sheets 
without really referencing the true credit risk of that loan?
    Ms. Eberley. So you're saying, if a fair market value were 
adopted on a wholesale basis for loan portfolios?
    Mr. Neiman. That's right.
    Ms. Eberley. Yes. It would. It would inject a lot of 
volatility.
    Mr. Neiman. Would you like to comment on issues around 
calls to impose a full fair market accounting on loan 
portfolios held by banks?
    Mr. Greenlee. I think that you have highlighted one of the 
key considerations since a lot of the issues we were dealing 
with concern how to value the assets. We have gone through a 
period where valuations have been challenged, particularly with 
some of the mortgage-backed securities. I think the question 
you raise is really a question of at what value do you have a 
buyer. While a buyer would buy at distressed level, which would 
be a valuation of a different kind than just looking at the 
collateral values.
    Mr. Neiman. I want to come back to these differences, and 
we're going to hear a lot, I assume, from the second panel, on 
the difference between credit risk and term risk. There are 
really two categories of commercial borrowers who are going to 
be facing default. One group that faces a credit risk due to 
fundamentals like increasing vacancies and decreasing rent 
rolls or an inability to make those payments. And another group 
who are paying on time and have sufficient cash flow on 
projects that are performing, but the value of the collateral 
has declined so much that in any refinancing they would have to 
come up with sufficient equity to refinance that project and 
have an inability to do that and thus face default or 
foreclosure.
    Can you elaborate on what are the key drivers? Where do you 
see those falling out and impacting banks, which are the key 
drivers to foreclosures in commercial real estate?
    Mr. Greenlee. I'll comment first. I think we have seen a 
lot of construction projects, for example, come to completion 
or be running into difficulties in the last few years in 
particular. That is why the whole focus on the borrower's 
ability to repay, to sell the property, or to find a permanent 
investor, is such an important issue and that is where we have 
tried to focus.
    Some of our thinking behind this guidance that we issued 
last October was to try to address the other point you were 
making about the huge amount of refinancing risk that we see on 
the horizon and we know the property values have declined. Even 
if the borrower does have the ability and willingness to pay, 
the terms and conditions, and what the values are going to be, 
potentially are very different than when the original loan was 
made. And so our thought was that we need to find a way to 
restructure these loans. We need to find a way to enable these 
people that have an ability and willingness to repay, to stay 
in that property. We believe that is better for the bank and 
for everyone involved.
    Mr. Neiman. Do you want to comment?
    Ms. Eberley. I have nothing to add. I agree completely.
    Chair Warren. Thank you. I'm actually just going to pick up 
on the same theme in a short question. We are talking about the 
importance of capital, and that you need more capital, private 
capital injected in these banks, not more government money in 
them. But capital investments depend on confidence, and that 
confidence is based on an accurate assessment of what this bank 
is worth, and that depends on how these assets are valued. And, 
frankly, the regulators don't give us a lot of confidence, 
based on their most recent history. I'm concerned about the 
shifts in accounting standards. I understand the point that 
Superintendent Neiman has raised and that Mr. Atkins raised. 
But I want to go back to this October 2009 change. As I 
understand it--we all understand--that any loan that has a 
loan-to-value ratio that's low, that has a lot of equity in the 
deal, is a loan that's most likely to be repaid. And so as I 
understand this change in accounting, it says that, hey, if 
you're in negative territory, if there's not only no equity, 
but that you're actually below water on this loan, you don't 
have to reflect that in your books. You soften how to reflect 
that in your books. And what concerns me is how this helps 
improve the confidence in the banks that--that the books 
accurately reflect where the banks stand financially so that 
investors say it's good to invest in banks?
    Every time I see this softening, I'm really troubled by it, 
and I just want to understand it better. Ms. Eberley.
    Ms. Eberley. I wouldn't call it a softening, but the 
guidance I think is much more structured to say you need to 
recognize the reality of the economic situation for the 
borrower and find a way to move forward. That may require a 
partial charge down in the loan balance. So the bank would--
would reflect a loss and restructure a loan at a lower balance 
that the borrower can then move forward with. That can be a 
better deal, as Mr. Greenlee said, in the long run for the 
financial institution----
    Chair Warren. That one I totally understand.
    Ms. Eberley. Okay.
    Chair Warren. That's not my concern. You've written it down 
and it now accurately reflects what the properties were and the 
likelihood that it's going to be repaid. But where I am 
concerned is the part that I'm reading that says, in effect, if 
you've gone from a loan that had a positive equity on it to a 
loan that has a negative equity on it, you don't have to change 
your books so long as you can continue to collect monthly 
payments. You don't have to change in your books the value of 
that loan. Now, if I'm not understanding this correctly, that's 
fine, but I want to understand it.
    Ms. Eberley. No, that's correct. And if the borrower has 
the financial wherewithal to repay the loan and you're looking 
at the borrower's obligations on a global basis, and they have 
the capability and demonstrated willingness to repay the loan, 
there's no reason to write down that loan.
    Chair Warren. You are saying there's no reason to write 
down a loan. We should treat loans exactly the same whether 
they have positive equity or negative equity? I don't know any 
banker on earth who has done that prior to this time, and, yet, 
this is what the regulators are saying we should do? We should 
treat those as if they were the same value?
    Ms. Eberley. Bankers are making loans based on the 
borrower's ability to repay. The collateral is the secondary 
source of repayment, not the primary.
    Chair Warren. I'll stop. Mr. Atkins.
    Mr. Atkins. Thank you. I just wanted to pick up on your 
discussion earlier about guidance with respect to market 
accounting and FASB 157. Of course this comes up and when I was 
at the SEC in the summer of 2008, we were hearing a lot of 
stories about how accountants were forcing complete write-offs 
of some of these securities based on there being no trades or 
looking at the indexes and things that were indicating that the 
values were very low. The SEC, finally, in September of 2008, 
when FASB came out with guidance with respect to 157 to clarify 
the orderly market aspect of that, which I think was overdue 
and finally helpful, relieved some chaos in the market. So I 
was wondering, do you view that guidance now as being 
sufficient? Does there need to be additional guidance, with 
respect to mark-to-market accounting, or how do you perceive 
that in your activities?
    Mr. Greenlee. I think that it was helpful to get 
clarification. What I believe raises the most questions are the 
Level 3 assets and how those ultimately get valued. As we've 
gone through the valuation process, the banks, our examiners, 
and the broader marketplace improved their ability to evaluate 
those assets. Confidence increased that the right factors were 
the focus. It is also important not to be based solely on an 
index or something that tended to maybe overshoot on the way 
down. Certainly, when you encounter illiquid markets, valuation 
does get to be a challenge, and there is also a lot of modeled 
risk that has to be managed. Fortunately, we have seen 
improvement since we went into this financial crisis.
    Mr. Atkins. The pressure from the outside accountants has 
abated because of that, so I assume that management now can 
point to this guidance and that's proven helpful?
    Mr. Greenlee. I believe it's helpful. But I also believe 
that a lot of those assets that were in question at the time 
were written down quite a lot. So I am not sure there are going 
to be further significant write-downs on those particular 
assets. Valuation practices, at least in some of the larger 
firms, have improved.
    Mr. Atkins. Okay. All right. Thanks.
    Chair Warren. Mr. Silvers.
    Mr. Silvers. Yes, thank you. This may not seem like it 
follows the thread of the conversation, but I'm going to come 
back around to it. Some of the testimony we have for today 
suggests strongly that in this area, in the Atlanta 
metropolitan area, real estate development, residential real 
estate development, and all of the ancillary activities 
associated with it, is a very large portion of the economy in 
this area. Do you all have a sense of roughly what that appears 
to have been? Meaning how much economic activity have we lost 
as a result of the deflating of the bubble in this area?
    Ms. Eberley. I can't give you a quantification of that. We 
can go back to our research staff and give you an answer in 
writing.
    Mr. Silvers. Do you have a sense that it's big?
    Ms. Eberley. It is big. It is big. The Atlanta economy has 
been driven by construction for many, many years. This goes 
back to the early 1980s that it's been a trend. It certainly 
has become more pronounced in the last decade.
    Mr. Silvers. Mr. Greenlee, any thoughts about this?
    Mr. Greenlee. Well, I don't live here, but my impression 
and my understanding is exactly what Ms. Eberley described. 
Construction and real estate development was a big driver of 
the economy here. In terms of answering your question, I can 
speak to the Federal Reserve Bank of Atlanta staff and see if 
we can get you additional information.
    Mr. Silvers. It would be interesting to have some data on 
that. Not just the direct development activity, but, as one of 
our other witnesses put it, everything that flowed from it, 
architecture, furniture sales--secondary, tertiary. I would go 
for that. The reason I want to put that on the record is 
because it seems to me that the conversation we've just been 
having about mark-to-market, about capital requirements and the 
like, appears to--tell me if you disagree--but it appears to 
suggest a strategy of attempting to kind of hold on as much as 
possible to a set of values and arrangements based on that 
economy that is no longer with us, in the hopes that we will 
somehow return to it. I think this conversation about trying to 
focus on rent, on cash flow, as opposed to property values, to 
collateral value, it has that feel to it. And that would appear 
to run the risk that, if we're not going to be able to return 
to that type of economy, we are essentially locking in the 
financial system in a way that will make it unable to shift to 
finance activity that could actually lead to renewed growth. 
Can you comment on your views of whether or not I'm identifying 
a reasonable matter of concern?
    Ms. Eberley. Well, let me make a distinction that might 
help address some of the concern that Chair Warren expressed, 
as well. When a loan at an institution is considered 
collateral-dependent and when the borrower's ability to repay 
is clearly nonexistent or not sufficient, the institution is 
required to look to the collateral value and write the loan 
down to the collateral values. But that's where the borrower's 
ability to repay is no longer apparent or evidenced and more 
certainly if payment is not happening.
    Mr. Silvers. Well, if your primary measure of value 
deteriorates then----
    Ms. Eberley. Right.
    Mr. Silvers [continuing]. You look to your secondary 
collateral. Is it good enough?
    Ms. Eberley. Right. And the accounting rules require that 
the balances be written down.
    Mr. Silvers. Thank you.
    Ms. Warren. Thank you. Mr. McWatters.
    Mr. McWatters. Just a quick question. Would you support the 
investment of additional TARP funds in Atlanta regional 
financial institutions because of the CRE problem? Is it that 
bad or will it recover in due course?
    Ms. Eberley. Additional capital in Atlanta financial 
institutions would be most helpful, and economic recovery would 
certainly make a difference in Atlanta, as well.
    Mr. Greenlee. I would echo that. Improved capital would be 
helpful to the banks.
    Mr. McWatters. So additional TARP funds?
    Mr. Greenlee. You would have to look at the details of the 
program and go through the process that we have been going 
through with the banks that applied for TARP. Generally, 
improved capital positions would be helpful.
    Mr. McWatters. Okay. Thank you.
    Chair Warren. Superintendent Neiman.
    Mr. Neiman. Thank you. Three questions that I hope to get 
in.
    Chair Warren. Talk fast.
    Mr. Neiman. They are critical to our February report. Do 
you see CRE as posing a systemic risk to recovery and financial 
stability or does it not rise to the level of residential and 
subprime and can be contained?
    Mr. Greenlee. From our perspective, it is an important 
exposure that the banks we supervise have. We have a lot of 
banks with significant concentrations and they are under stress 
because of the weakness in the CRE markets. And so it is 
something we do focus a lot on and spend a lot of time working 
on.
    Ms. Eberley. I would say that commercial real estate values 
have declined more than they did in the last commercial real 
estate crisis in the late 'eighties, but there are important 
protections, from a regulatory standpoint, that have been put 
in place since that time, including enhanced appraisal 
regulations, regulatory guidelines about loan-to-value 
limitations, and enhanced underwriting practices and 
institutions. So I think there's some mitigation there.
    Mr. Neiman. Stress tests. Do you think that stress tests 
should be rerun for an expanded class of institutions beyond 
the SCAP approach or with the new assumptions?
    Mr. Greenlee. What we are focused on right now at the 
Federal Reserve is really trying to get improved stress testing 
practices in the banks that we supervise improved. We think 
that is an improvement that the banks we need to better manage 
their business.
    Mr. Neiman. Stress tests done by the bank?
    Mr. Greenlee. Yes. That is what we would like to see.
    Mr. Neiman. Or the FDIC on an isolated basis. I know we 
used a stress test in particular institutions where we think it 
may present a problem.
    Ms. Eberley. We absolutely do. And I think that stress 
testing by financial institutions on their own balance sheets, 
on their own economic circumstances, and their locality are 
very important.
    Mr. Neiman. And then the third question. Are there any 
changes in public policy that you would find helpful, 
particularly in dealing with commercial real estate? It's kind 
of a follow-up to Mark's question. Either in the TARP program 
itself or outside of TARP that would help address this from 
either a Treasury or a regulatory perspective? Are there tools 
that would be helpful to you in dealing with CRE?
    Mr. Greenlee. I can only comment that we did what we 
thought we could with the TALF, in terms of trying to help 
support the CMBS market and provide financing there.
    Mr. Neiman. From the FDIC's perspective, are there any 
changes needed to the public policy or tools?
    Ms. Eberley. I think the best tool that we have is to work 
with the institutions and get them to work with borrowers.
    Mr. Neiman. Great. Do you think that CRE guidance is fully 
understood by institutions, or is there still work to be done 
in getting institutions to really understand their 
responsibilities with respect to modification?
    Ms. Eberley. Yes. I think it's an ongoing process.
    Mr. Greenlee. Yeah. We've done some initial outreach, but 
we recognize we need to do more.
    Chair Warren. Thank you very much. This panel is excused. I 
would like to call the second panel. I am pleased to welcome 
Brian Olasov, who is the managing director of the Atlanta 
office of the law firm McKenna, Long, and Aldridge. David 
Stockert is the CEO of Post Properties, an Atlanta-based firm 
that develops and operates apartment buildings. Chris Burnett, 
the CEO of Cornerstone Bank, a community bank in the Atlanta 
region. Hal Barry, chairman of Barry Real Estate Companies, an 
Atlanta-based developer of commercial property. And Mark 
Elliott who is a partner at the Atlanta office of the law firm 
of Troutman Sanders and the head of the Office and Industrial 
Properties practice. I appreciate you all being with us today. 
I'm going to ask you, as I did with our first witnesses, if you 
would hold your oral remarks to five minutes or even less so 
that we'll have more time for questions, but your written 
testimony will be part of the public record. Thank you very 
much. If I could start with you, Mr. Olasov.

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

    Mr. Olasov. Madam Chair and distinguished members of the 
Panel, I'm very enthusiastic to be testifying before you today. 
In fact, I'm chomping at the bit after that first panel to 
discuss some of these issues.
    Chair Warren. We thought you might be.
    Mr. Olasov. As the Panel described in selecting the site 
for today's discussion, it's entirely appropriate that the 
hearing be held in Georgia, whose banking system has suffered 
disproportionately. Over the past couple of weeks I've had the 
opportunity to discuss my views with staff members of the 
Oversight Panel, and I'd like to reiterate some of these 
opinions today.
    By way of background, I have worked in commercial banking, 
investment banking, a bank regulatory research environment, 
academia, and I'm currently at a national law firm where I've 
had the opportunity to assist in large, complex real estate 
workouts, both in commercial and residential transactions 
shared between portfolio lenders, banks that we're going to 
discuss in greater detail today, and in the area of structured 
finance, MBS and CMBS. I have worked extensively as an expert 
witness in litigation involving residential and CMBS.
    During the previous downturn, I collaborated on building a 
historical market to market model for the thrift industry and 
testing, and frequently refuting various theories of 
conventional wisdom concerning what happened to the thrift 
industry, what were the factors that actually collapsed the 
thrift industry.
    My written statement can be brief, as I have also submitted 
two recent editorials, along with a draft white paper that 
reflects my views on a policy prescription to deal with the 
continuing unresolved problem of toxic assets in banking. That 
reflects very much the thoughts of COP's August report. And I 
applaud the August report and some of their conclusions 
reached.
    Let me summarize my opinions and observations. In my view, 
there is a logical and inevitable sequence that follows from an 
inability or unwillingness to move problem assets from banks. 
The inability or unwillingness of banks to remove these assets 
stems from the overwhelming and justified desire to preserve 
regulatory capital. As long as banks sit on material levels of 
problem loans, given the volatile nature of the value and cash 
flow attributes of these loans, available cash will migrate to 
excess reserves of the Fed or low-risk securities include 
Treasuries and agency mortgage banks.
    When regulatory enforcement is perceived by bank management 
as either unfairly severe or capricious, and I think that's 
applicable to the earlier discussion on policy guidance that 
came out in October, this accelerates the movement towards more 
restrictive lending policies, and this is dramatic and 
demonstrable. This results in a constriction of available 
credit.
    Since the architectural intent of financial stability in 
all its guises, obviously including TARP, is to bridge the 
economy until private sector demand reengages, the absence of a 
healthy, functioning credit allocation system, primarily a 
banking system, prolongs the need for this bridge to exist. 
This comes at a terrible price to the real economy and to the 
American taxpayer that must support this skein in subsidies.
    Conventional wisdom holds that distress in residential 
markets has bottomed out. I happen to disagree with that. And 
that the commercial real estate mortgage market is the next 
shoe to drop. My own informal research indicates a lag of 
approximately six quarters between residential and commercial 
mortgage markets. If this relationship persists, and in the 
presence of delinquency and default numbers that are still 
rising in residential mortgage markets, commercial markets are 
at least 18 months, and I would argue considerably longer, from 
touching bottom.
    The deteriorating performance of the CMBS market gives us a 
predictor of increasing problems in bank portfolios, as can be 
seen in the graph. And for those of you who have a copy of 
this, CMBS, I think, is instructive because it doesn't suffer 
the same accounting confusions that the earlier panel touched 
on.
    Until we design a mechanism that promotes the movement of 
problem assets off banks' balance sheets, banks will be less 
inclined to meet reasonable, prudent borrower requests. This 
problem will become increasingly acute as 1.4 trillion dollars 
of commercial real estate loans balloon over the next three 
years. At a national level where banks hold 1.8 trillion of CRE 
loans, or 13.5 percent of all bank assets, a deterioration of 
CRE portfolios will jeopardize some already weakened banks. And 
I would add that those are likely to be in those same areas 
that are currently suffering residential problems, making it 
much more difficult for those regional banks in that regional 
system to recover.
    In Georgia, where 23----
    Chair Warren. Mr. Olasov, I'm sorry, sir. We're at five 
minutes. I'm going to ask you to finish up, please.
    Mr. Olasov. All right. Thank you. I'll end on a positive 
note, which is to say that in supporting CMBS and indirectly 
commercial mortgage lending, TALF has contributed to a dramatic 
reduction of spreads on senior bonds. TALF funding has been 
extraordinarily limited, but it's still been extremely helpful 
including promoting new CMBS issuance in the fourth quarter.
    [The prepared statement of Mr. Olasov follows:]
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    Chair Warren. Thank you very much. Mr. Stockert.

  STATEMENT OF DAVID STOCKERT, CHIEF EXECUTIVE OFFICER, POST 
                           PROPERTIES

    Mr. Stockert. Thank you, Madam Chair, distinguished members 
of the Congressional Oversight Panel. I am David Stockert, the 
president and CEO of Post Properties. We are a REIT that owns 
and operates nearly 20 thousand apartments in 55 communities. 
Our total market capitalization is roughly two billion dollars. 
I am testifying for the National Multi Housing Council and the 
National Apartment Association and have been asked to discuss 
the state of the apartment market.
    2009 was one of the most challenging years in memory for 
our industry. The vacancy rate for investment grade apartments 
hit eight percent in fourth quarter, an almost 30-year high. 
2009's 2.3 percent drop in rents nationally was the largest in 
30 years. With more than four-and-a-half million vacant rental 
units, absorption rates for newly completed apartments had 
dropped to the lowest levels since 1989. Property values have 
declined by more than 30 percent, and transaction volume has 
plummeted from $100 billion to around $14 billion in just two 
years.
    Because of the capital shortage, new apartment development 
has come to a virtual standstill. New apartment starts set a 
post World War II record low of 84 thousand units down 67 
percent from a year ago. This comes as the foreclosure crisis 
and the echo boomers entering the housing market have modestly 
increased demand for rental housing. Analysts project the 
growing demand will create a shortage of apartments beginning 
as early as late 2011.
    In addition to these challenging conditions, our industry 
faces an estimated 50 to 60 billion dollars in loans maturing 
in 2010 and 2011 that will need to be refinanced. Now, many 
believe that 2010 will likely mark the bottom fundamentally of 
the market, but the headwinds are still very strong. GDP may 
recover in 2010, but significant job growth is not expected 
until 2011 or later, and employment is the primary driver of 
demand in our business. The loss of over eight million jobs is 
a severe blow to the industry. In addition, we think the 
recovery will likely be one based on a flight to quality. 
Public companies like ours will have greater access and do have 
greater access to low-cost debt and other forms of capital. 
Other nonpublic companies in our industry are not nearly as 
fortunate.
    Older properties with weaker sponsorship and properties in 
secondary markets will continue to find it difficult to access 
capital.
    Looking at the capital markets, the multifamily sector has 
benefited from the presence of the GSEs, Fannie Mae and Freddie 
Mac, and the FHA multifamily mortgage insurance program, which 
has served as a partial replacement for the construction 
financing. These two capital sources accounted for 90 to 95 
percent of all the multifamily debt issued in 2009.
    While the multifamily sector has enjoyed more liquidity 
through the GSEs than the rest of commercial real estate, 
industry has not been all good news. All debt sources have 
tightened their requirements, meaning firms must provide 
additional equity, refinance debt, purchase property, or start 
a new development. With most equity sources on the sidelines, 
this has exacerbated the capital shortage in the apartment 
sector.
    The GSEs are very necessary, but they're not wholly 
sufficient. Reestablishing a viable CMBS market is also 
critical. This will require reforming the regulatory oversight 
in Wall Street and improving transparency and rating agency 
performance. In addition, we are urging the Treasury Department 
to extend the TALF program through 2010.
    I also want to address the widespread media coverage of 
multifamily CMBS defaults. These reports have left the 
impression that all multifamily mortgages are experiencing high 
default rates. This is untrue. CMBS represents just 12 percent 
of the more than 900 billion of outstanding multifamily loans. 
The vast majority of multifamily mortgages are held by 
commercial banks, insurance companies, and the GSEs. When those 
loans are examined, multifamily default rates are quite low. 
Delinquencies for loans issued by insurance companies and GSEs 
remain well below one percent, and the GSEs are underwriting 
new multifamily loans with good coverage ratios and relatively 
moderate loan to value levels.
    Given the importance of the GSEs to the apartment sector, 
we are closely watching reform efforts, which are just getting 
underway. In the short term, we are reassured by the Treasury's 
December 24th announcement confirming its unlimited support for 
the GSEs through 2012. In the long term, however, it is 
critical that policy makers understand the unique needs of the 
multifamily housing sector and not restrict the supply of 
multifamily capital as they reform the single family financing 
process.
    Among other things, the reformed GSEs must continue their 
vital role as a source of permanent debt to refinance 
construction loans. They should also continue to provide 
capital for affordable housing projects with greater risk 
profiles.
    Chair Warren. Mr. Stockert----
    Mr. Stockert. I'm going to stop there, and thank you very 
much for listening.
    [The prepared statement of Mr. Stockert follows:]
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    Chair Warren. Thank you very much. I appreciate it.
    Mr. Burnett.

     STATEMENT OF CHRIS BURNETT, CHIEF EXECUTIVE OFFICER, 
                        CORNERSTONE BANK

    Mr. Burnett. Thank you. Good morning. I am Chris Burnett. I 
am the chief executive officer of Cornerstone Bank 
headquartered here in Atlanta. Cornerstone is one of Georgia's 
25 largest community banks with assets of 550 million dollars 
with one-third of our loans in housing, one-third of our loans 
in small business financing, and a third in commercial real 
estate loans. We do have a balanced portfolio and a balanced 
perspective on the problems facing our economy today.
    Commercial real estate is certainly a challenging area, but 
you cannot talk about this category without stressing the 
impact that has been had from the housing industry. As we all 
know, new home construction and residential lot development was 
the first issue to hit the economic downturn. When the mortgage 
market seized up, builders could not find buyers for their 
homes, and the need for developed lots virtually went to zero, 
causing many developers to fail and leaving hundreds of 
projects in suspension.
    The effectors, the effect on our lenders was devastating. 
In Georgia, we've already seen 30 community banks fail, all of 
which had heavy concentrations in residential development and 
construction loans.
    We've also seen the problems in the job market. We're 
acutely familiar with the devastation in our residential 
housing and its impact on the economy, as thousands of jobs 
have been lost in Georgia in that industry and many more 
workers leaving our state.
    Regarding commercial real estate, for most community banks 
like ours the typical client is a business owner with financial 
substance, substance that has been--or has had the wherewithal 
to move from rental space into owner-occupied buildings. Unless 
those owner-occupants were involved in the real estate industry 
or retailing, most borrowers continue to make their payments on 
time, and the performance of most owner-occupied commercial 
loan portfolios remain satisfactory through 2009. But the 
difficult economy has taken its toll, draining earnings and 
liquidity from once strong borrowers. The aftershocks of the 
recession continue to abate a recovery and consumer confidence, 
thus restricting spending. As a result, we are now seeing a 
rise in borrower and tenant distress. Tenants are asking for 
rental concessions, which are often granted, but this reduces 
the cash flow available to meet debt service. This issue is 
systemic at all levels. Even the larger banks, the insurance 
companies, and the pension funds that lend on the much larger 
commercial projects are also reporting similar stresses. As we 
have talked about, vacancy rates for these projects in the 
metro Atlanta area are now over 20 percent, and that sort of 
rate is not sustainable with the level of debt that most owners 
incur to bring those projects to market.
    On the retail front in particular, where the greatest 
deterioration is occurring, as long as unemployment remains 
high and the economic news is negative, consumer spending will 
be tight. As a result, more retailers, especially 
nonfranchised, small businesses are closing. The same is true 
for service businesses that occupy office space. As these 
companies contract or close all together, vacancy rates climb 
and cash flows available for debt service decline. The banks 
are then often confronted with a dilemma. They must either 
foreclose on the properties or restructure the mortgages, 
allowing them to convert to interest-only payment terms and 
often times lowering their interest rates. These loans then 
become known as troubled debt restructures, meaning that they 
must be classified as substandard assets. New appraisals are 
mandated by regulatory rules, and if the new values do not 
support those loan balances, specific reserves must be 
established further eroding bank capital.
    There is no question that it's more unlikely today for 
borrowers to obtain credit. Borrower's financial conditions 
have deteriorated making loan decisions more difficult to make. 
Strong pressure by regulators to reserve for projected loan 
losses and to reduce real estate lending concentrations further 
impairs a borrower's ability to obtain credit. In many cases 
throughout Georgia, regulatory orders directed at troubled 
institutions mandate no growth and asset shrinkage policies, 
therefore making it impossible for those banks to extend 
credit. And all of this goes on while private capital sits on 
the sidelines still apprehensive to invest in Georgia's banks.
    Let me be clear. We want to make good loans to help 
businesses in our communities grow. That is what we do and that 
is what our industry is all about. That is what Main Street 
banking is all about. But it can be frustrating to borrowers 
and bankers when we are told lend more and be as flexible as 
possible with workouts, but also apply the hard lessons learned 
related to sound underwriting. With these conflicting messages, 
lending more money right now is a very delicate balance.
    And finally asking--I'm going to speak briefly on the TARP 
issue. Twenty-six banks in Georgia have received TARP 
investments. My bank is not one of those. The TARP application 
process was perhaps the most frustrating regulatory experience 
in my 30 years in this industry. Our bank applied in 2008 as 
soon as the program was announced. We were finally told to 
withdraw our application in October of 2009, almost a year 
after the program began. Early in the process we had new 
capital lined up alongside with TARP, because the receipt of 
TARP was viewed as a confirmation of viability, but after ten 
months of waiting for an answer, those capital sources had 
dried up.
    In my opinion, the measure of TARP's effectiveness can be 
assessed in two ways. If the intent is to help banks clean up 
their balance sheets and rid them of troubled assets, then it 
has been effective to a degree in Georgia. Those banks that did 
receive TARP investments have been able to rid their books of 
some distressed assets, although at extremely low values. 
However, if the intent was to stimulate more lending, the jury 
is still out on TARP's effectiveness.
    Banks have burned through enormous amounts of capital for 
both actual and projected losses with only about 40 percent of 
Georgia's banks currently profitable. Banks cannot increase 
retained earnings. They cannot shore up their capital positions 
until they return to profitability.
    Chair Warren. Mr. Burnett, I'm going to have to stop you on 
time there. But thank you very much. We wanted to hear this 
about TARP. Thank you.
    [The prepared statement of Mr. Burnett follows:]
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    Chair Warren. Mr. Elliott.

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

    Mr. Elliott. Thank you, Professor Warren and members of the 
Panel. My name is Mark Elliott, and I'm the head of the office 
and industrial real estate group at Troutman Sanders. As Mayor 
Reed said, Atlanta is a real estate town. I have seen more 
distress in the market here in the last year than in my 30 
years of practice. And before I get into specifics, let me just 
share something with you anecdotally on the numbers. Just to 
kind of illustrate the point: deal volume for transactions, 
that's purchases and sales in 2007 compared to 2009 in our 
business has gone down to roughly one-sixteenth. It's roughly 
in 2009 six percent of what it was in 2007. And we, as a 
country and the press, decried and panic when retail sales 
nationwide drop by seven percent. We dropped by 95 percent, and 
that distress is remarkable, and it's having catastrophic 
effects on the service providers in the industry.
    And I think there are two reasons for this. It relates from 
problems on the supply side and problems on the demand side. 
And, Mr. Atkins, you had asked for some comments on the demand 
side. And I'm very happy to address that now.
    Basically, for a real estate developer or an owner to 
borrow money, they basically need to make sure that they are 
going to have a return on that money and a profit that covers 
the cost of the capital plus the cost of borrowing, plus some 
profit to the owner. And I think for three specific reasons, 
you're not going to see borrowing of any kind of rigor for 
quite some time. The first of which is, and people have 
addressed it here today, it's the tremendous loss of jobs in 
our economy, and I know you used an eight million figure. I 
think it's 6.1 million jobs lost in calendar year 2009. And, 
Mr. McWatters, as you said, we'll build this back one job at a 
time, but the crash in the real estate industry has occurred 
one job loss at a time. And every loss of those jobs represents 
an empty office somewhere and--or at least there's some very 
strong correlation. So eight million jobs lost is a lot of 
empty offices.
    The second point is a tremendous loss of confidence in the 
business sector coupled by a loss in market cap on the tenants 
of this space. Just like builders build buildings on the come, 
so do tenants lease on the come, and when you're a business 
unit owner, and you're leasing space in the future, you're 
making business expectations and you're making business 
judgments on the basis of your business growing or at least 
that's been the hope. There is complete loss of confidence on 
the business growth aspect. And I would say the tenant base is 
much more worried about what they can do to shrink or get out 
of their lease five years from now than they are on what they 
can do to grow that lease.
    And the third one is the whole mandate on the corporate 
America to cut costs and to cut costs aggressively. Typically, 
you'll see that the second greatest cost that business unit 
owners faced after employment is real estate costs, and people 
are cutting their space and they're cutting the cost of their 
space, and they are very, very aggressively renegotiating lease 
rates. And, Mr. Neiman, you made the point about looking out at 
the Hyatt Regency 25 years ago and being able to see a nice 
view of Atlanta. Even though there are buildings in the way 
now, because of the empty offices they have in the upper levels 
of those buildings you can just look right through the windows 
and enjoy those views again. And that is having a very, very 
dramatic affect on the value of businesses.
    I guess I'll summarize in this last minute. I think the 
commercial office market, if you look at the life of an office 
building, it's almost like an aircraft carrier. You can't brake 
it on a second's notice, and you can't accelerate it on a 
second's notice. And what you're going to continue to see as 
leases roll over the next three, six, nine, 12, 15 months that 
you're not seeing now is empty offices where tenants are still 
paying coupon rate and contract rate because that's their 
obligation, are going to continue to shrink because that 
represents their actual need for the space. They are going to 
continue to aggressively renegotiate their lease rates to 
reflect current value, not what they agreed to pay in 2001, 
when they entered into that lease. And so, I think you're going 
to continue to see on the demand side an incredible reticence 
to engage in any kind of borrowing. And I'll stop there.
    [The prepared statement of Mr. Elliott follows:]
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    Chair Warren. Thank you very much, Mr. Elliott. Mr. Barry.

 STATEMENT OF HAL BARRY, CHAIRMAN, BARRY REAL ESTATE COMPANIES

    Mr. Barry. Thank you very much for having me, and I really 
appreciate the opportunity to be here. A lot to think about. 
You all said a lot of things that made me do more thinking. Let 
me begin with a quick introduction of who I am. I am president 
of Barry Real Estate Companies. I am an Iowa native, but have 
been in Atlanta and involved in commercial real estate since 
1966 and as a developer since 1975. Mr. Neiman, you may 
remember John Portman. I was partnered up with John Portman on 
a development in the suburbs as Portman-Barry, and in the 
1980s, we were the guys that built the big, spec buildings and 
hoped they would lease as office buildings. And we proved that 
didn't work. And in 1995 we formed Barry Real Estate Companies. 
And, hey, as opposed to big, and spec, and empty, our approach 
was take the supply and demand that you referred to earlier out 
of the equation, but build to lease properties, so a little 
different equation. You have to learn how to meet the demand of 
that prospect and how to show him how you can deliver a 
building whether it be a year later, or two years later, or 
even longer, but how to develop, design, and finance a 
property. Give him the lowest possible rent structure, but also 
create the lifestyle for that tenant.
    Well, we've had a hell of a run at it. It's been good, 
about four million feet. We're a small entrepreneurial Atlanta-
based company that has been able to develop on a user-basis 
throughout the country. And so it was rolling really good 
until, as you know, this started happening about two years ago. 
And let me talk about some of our problems with our existing 
portfolio and then--and then the pipeline, as I see it today.
    On the existing issues, in downtown Atlanta we are 
developing a project not too far from here and when you go out, 
as you go down the expressway, you'll see this. You'll see part 
of it. You'll see a building that's leased to Ernst & Young and 
other tenants, a preleased building, and across the street 
you'll see the Southern Company building, two buildings. We 
went into an area that the last new building that had been 
built in downtown Atlanta was probably 15, 20 years ago, and we 
saw this movement to midtown, and we saw the exodus to the 
suburbs, and I was part of that, but we saw a real opportunity 
downtown. And so we felt we could make a deal that moved the 
headquarters of Southern Company down there. It worked. So we 
bought the next site and built the Ernst & Young building. You 
will see our W Hotel is there as well. But in the process of 
that, we said, look, this is the urban center of Atlanta. This 
is where it should happen. This is where--we talk about 
commuting, and we all know Atlanta created the colossal traffic 
jam 24 hours a day. You know, it is awful. And so we said 
there's a better way. There's a better way than public 
transportation. That better way is walking to work, that is 
live, work, play communities. And so what we did over the last 
four years, five years, in red, and I can submit you copies of 
this, is a total of nine blocks that we assembled. Some of 
which we have under contract, part of which we owned with Mr. 
Stockert and Post Properties to build residential on it, but a 
total of nine blocks. A focus on urban living--a live, work, 
play, walking community--Atlanta is beginning to figure it out. 
There's a better way than sitting in the automobile. And so we 
we're headed toward the most exciting thing I've ever done.
    But guess what? With this recession, it hit us really hard. 
So about a week ago or two weeks ago, it hit the press. We have 
a lender, a bank who has a loan on the best site we've got, the 
one where that big building's planned. We designed that 
building out for various users. We're not going to start a spec 
building at that size. In fact, back to our user-driven 
philosophy, we don't start spec buildings. You don't have a 
tenant; you don't build. Take the supply and demand risk out of 
it.
    Chair Warren. Mr. Barry, we're out of time here.
    Mr. Barry. Are we out of time?
    Chair Warren. Do you want to give us a sentence on how the 
story comes out?
    Mr. Barry. Well, I want to move onto one other thing. That 
is, very quickly, we tried to finance. We were lucky. Our user-
driven business signed leases with the U.S. government to build 
four GSA facilities in St. Louis, Minneapolis, Cincinnati, and 
Portland, Oregon. Finding a bank--a U.S. bank to finance 
government-leased buildings in today's market--Mr. Silvers, 
you're laughing. You know where I'm coming from. It's been a 
real chore.
    Chair Warren. Thank you, Mr. Barry.
    So I'd like to start with my questions with the reason we 
do field hearings. I read a lot of different speculation about 
where we are in this commercial real estate downturn. And here 
we are in Atlanta with five people who have clearly got dirt 
under their fingernails and are trying to live through it. And 
I would just like your assessments. And where we can, give a 
little bit to back it up. Where are we in this? You know, is it 
that we've gone down and we've hit bottom, we're near bottom? 
Mr. Elliott, you gave us some startling numbers about how far 
we've gone down, but you're talking about continuing to shrink. 
Can you give us some sense of what it feels like and what kind 
of data you can point to on where you think we are in this? Mr. 
Stockert, you look like you'd like to jump in first.
    Mr. Stockert. Well, I'll just--I can speak for the 
multifamily----
    Chair Warren. Please.
    Mr. Stockert [continuing]. Housing market. I think that we 
are nearing the bottom of fundamentals in our business. And I 
think many of us in the business feel like we are starting to 
at least see some glimmers in the way of some modest upturns in 
GDP that we might reasonably assume are going to lead to some 
job growth during the course of the next couple of years. The 
better fundamental factor for us is that the supply of housing 
of all kinds is coming to a near standstill. So, if you look at 
Atlanta at the peak, we were permitting 70 thousand housing 
units, and that wasn't just because people were nutty in 
development. There were 150 thousand people moving into the 
metro every year. We were trying to meet that demand for 
housing. And of course we overdid it.
    But today we are on pace to do six thousand permits, seven 
thousand permits in this market. So I get excited, as an owner 
of multifamily and one who's got a reasonable balance sheet, 
because I think that we will come to a point where we will be 
undersupplied in housing.
    Chair Warren. So you think, at least in residential 
multifamily, you look like you're near the bottom just because 
of a supply and demand----
    Mr. Stockert. Well, yes, on the fundamentals. We're going 
to have a terrible year in cash flow because the rents that we 
banked in last year are going to run through to the next year 
too, so cash flows are going to be down.
    Chair Warren. I hear you.
    Mr. Stockert. But, we can see some light.
    Chair Warren. Mr. Burnett.
    Mr. Burnett. Yes. I'll address the residential single 
family, which I do believe we are at the bottom of that 
marketplace. And particularly in the last several months we 
have seen an improvement in home sales, particularly in our 
foreclosed inventory, and we are down significantly on the 
number of homes in foreclosure. I think that's being driven by 
two primary factors. First of all, we know that interest rates 
are poised to increase, and, so, if people want to buy a home 
they need to strike now while rates are still low. And second, 
I think the first-time home buyer credit has been effective 
here in Atlanta, which is an affordable housing market.
    But, surprisingly, we are now seeing a pickup in lot sales 
for the first time because, as Dave said, we had about six 
thousand building permits issued this past year. And that's 
about two years consecutively that we've built virtually no 
products. So finally lots are beginning to sell.
    Chair Warren. And can I just ask, you don't think you have 
a shadow inventory problem that as things pick up you've got a 
lot of banks and others that didn't foreclose, and therefore, 
more property is going to gush back onto the market and push it 
back down.
    Mr. Burnett. I think from the banking perspective we are in 
a better position there because we have new product versus 
competing with a mortgage lender who has foreclosed on an 
existing home. When you're selling a brand new product that's 
never been lived in, it simply is more appealing.
    Chair Warren. Okay. But that doesn't mean that the whole 
market is at bottom. It only means the new market is at bottom 
and starting to turn out. The sale of previously owned homes--
--
    Mr. Burnett. Correct. And I think that the new market will 
lead us out of this. Existing home sales will continue to be 
much more sluggish.
    Chair Warren. Thank you. Mr. Elliott, can I ask you?
    Mr. Elliott. Thank you. You used a great term, which is 
shadow inventory. And I'm afraid that on the office side, 
unlike hotels which have their tenant base walk in every night 
and apartments, which have their tenant base walk out or not 
every 12 months, office leases are signed for ten or 15-year 
periods. And when someone quotes a 15 or 20 percent vacancy 
rate, they are not factoring in unused office space, shadow 
inventory that, when leases continue to roll in their natural 
course as they will every year over time, that you're going to 
continue to see large users giving back ten, 20, 25 percent of 
their space. So no, I don't think we've hit bottom, because I 
don't think we've accurately reflected what, on the user's side 
of the commercial office sector, the real use is.
    Chair Warren. Thank you. That's very helpful. Mr. Barry.
    Mr. Barry. Well, just maybe on a positive note. In 1995, we 
began to see the markets come back, and we started doing user-
driven type office buildings. We're seeing some of the same 
thing today. As far as multi-tenant buildings, it's a disaster. 
But if there are users that have specific needs that may want 
to do build-to-suit buildings, in our focus that's around the 
Southeast, we're seeing some of that now.
    Chair Warren. If the panel will indulge me, I'd like Mr. 
Olasov to give us his thoughts on this too.
    Mr. Olasov. Yes, just very briefly. I would say that what 
we are seeing in commercial real estate, we are into the second 
wave of weakness. The first wave I would characterize as 
structural, which is that there is just too much leverage on 
commercial property markets. The debt got too complicated. That 
raises all sorts of governance issues. If you take a look at 
the Moody's research showing peak to trough, where peak was 
October 2007 and where we are right now, all commercial 
property, all property types, all regions are down 43 percent. 
A big chunk of that's attributable to leverage problems and 
what I would call debt, debt structure, and capital stack 
problems. Now we are starting to see the second wave, and I 
would echo what Mark has to say. Different collateral types 
have different life cycles largely dependent on the duration of 
the leases. So if you take a look at the property types that 
are most demonstrably the weakest, you start with the shortest 
possible duration lease. That's a hotel. That's a one-night 
lease. And we're seeing delinquencies in CMBS pushing 20 
percent in hotels.
    Multifamily is the next shorter duration. Office, at the 
other end of the spectrum, tends to be longer term, more stable 
tenants, but, as you start seeing lease rollover, this is going 
to move from the capital problems to fundamental problems in 
operating income. And we haven't even begun to see that play 
out yet.
    Chair Warren. Thank you very much. Mr. Atkins.
    Mr. Atkins. Thank you. I'm just going to follow up with 
that too. So actually that was perfect. I wanted to explore a 
little bit more than our former panel of bank regulators who 
were talking about some of the steps that they've taken from a 
regulatory aspect to try to make it possible for banks to lend 
more. So I was wondering your perception, both as the banker in 
one case and with respect to either servicers or users in that 
business, how do you perceive the general attitude of banks to 
lend and whether that is because of, you know, perhaps over-
weeding examiners who are maybe too tough, or not tough enough 
on the other hand, or because there are other internal aspects 
that are keeping lending down, or is it more of a fundamental 
economic question that we have right now?
    So if you start Mr. Burnett, and we can go down the line.
    Mr. Burnett. It is difficult for me to speak across the 
board. But I know in our specific situation I have been very 
pleased with the relationship we have been able to maintain 
with our regulators through this, particularly here at the 
local level. They have had a good balance between the things 
that need to be said and the way that they say it. I will say 
that they are under pressure as well, obviously, to perform in 
their responsibilities. There are some accounting issues that 
must be enforced that are real Achilles to our industry right 
now. There are some regulations coming from Washington on 
liquidity that are very difficult that put banks in impossible 
positions of perilous liquidity.
    Those are not things that are decided at the local level, 
but they must be enforced by the local regulatory 
commissioners. I don't want to take a lot of time, but I can go 
into a lot of different issues on accounting and the way you 
have to account for your loan loss reserves and interest rate 
caps on deposits and things like that that are all working 
against capital and liquidity, the two things most important to 
our industry right now.
    Mr. Atkins. Mr. Olasov, and then we'll just go down 
quickly.
    Mr. Olasov. I don't think that there is any issue that 
there is significantly less capital available for lending to 
meet prudent credit requests--certainly in commercial real 
estate. There's a complete drought to meet the needs of either 
new legitimate business properties, or, I think more acutely, 
in terms of refinancing this enormous wave of commercial 
mortgages that are coming due over the next three years. And 
it's easily observable. All you need to do is take a look at 
call reports of the banking system to take a look at a decline 
in loans outstanding. But I think more importantly and more 
perniciously, if you go to the H-8 Federal Reserve reports, you 
see lines of credit, either corporate lines of credit that have 
been cut. Again, peak to trough 1.7 trillion dollars. This is 
the lifeblood of businesses, who then go into the marketplace 
to use space to create new jobs where at the bottom you have 
part of the food chain of small businesses. A lot of small 
businesses live off credit card borrowings.
    Credit cards, lines of credit available are down a trillion 
dollars, again peak to trough. That is absolutely observable, 
and very clear, and obviously it has extraordinary knock-on 
impacts on the economy, and specifically with respect to the 
ability of all the powers that be in Washington to start 
removing props that have been holding up the economy for the 
last year. That's the reason that I thought the third quarter 
GDP growth of three-plus percent was a very false positive, and 
that concerns me.
    Mr. Atkins. Mr. Stockert.
    Mr. Stockert. Yes. I don't want to repeat everything 
everyone said, but it's true. I do think in fairness it's true 
that you can't get the loan, or is it that you can't get the 
loan you want to get. You certainly can't get the loan that you 
got before.
    Mr. Atkins. Right.
    Mr. Stockert. And most of what we all are focused on at the 
moment is refinancing existing debt. Although there is not a 
lot of construction financing available, there is also not a 
lot of demand for that, because most of us, other than some in 
select cases where you've got builders, you just don't see the 
demand for it. But we live in the public market, and the public 
market has really been out front. In terms of price discovery, 
our stocks, the REIT stocks, hit their lows in March. That was 
a come to Jesus moment for all of us. That was price discovery 
on our assets. And since that time asset pricing in both the 
public markets and in the private markets has come back up a 
little bit. So back to the early comments about mark-to-market 
accounting. We do have to get the prices of discovery. We have 
to get to the right kind of reasonable price discovery, 
because, had we done it at all in March of 2009, we would have 
collapsed everybody and everything. And that would have been 
inappropriate to do. You know, we're getting closer today where 
we're finding realistic asset values in my opinion.
    Mr. Barry. Well, just quickly, one more time. I mean, on 
the four GSA deals, there's not financing in the marketplace. 
And we will get there. We are still working on them, and we 
will get there, but the banks are basically out of business. 
And it has nothing to do with balance sheet, our balance sheet.
    Mr. Atkins. Thanks. My time is up.
    Chair Warren. Thank you very much. Mr. Silvers.
    Mr. Silvers. I want to follow up on my colleague's line of 
questioning here. Mr. Barry and Mr. Stockert, if I understood 
your initial testimony, Mr. Barry, you showed us a layout of 
properties in downtown Atlanta. Am I right in understanding 
that currently you cannot proceed on that project?
    Mr. Barry. Well, the key block in the middle of it had a 
loan with a bank that has since been taken over by FDIC. We 
tried to extend the loan. We tried to do a workout, something 
short of continuing full payment. That didn't happen. They 
amortized on us. We have since agreed to come out-of-pocket and 
to carry it. I don't know exactly why we're doing it, because I 
don't think anything is going to happen in a year. We agreed to 
extend it for a year, to pay the interest, et cetera. And we're 
going to try to salvage that block because of what it means to 
Atlanta. What it means to Allen Plaza, and what it means to us. 
Do we have a tenant for it today? No. And it's the heart of 
what we're trying to do and what we're trying to prove in 
downtown Atlanta.
    Mr. Silvers. Let me just follow-up on this and I would 
invite any of you to respond with respect to this project or 
with respect to other projects, and Mr. Olasov, and Mr. 
Elliott, with respect to your clients' projects. It strikes me 
that, whether it's the GSA buildings or high-density downtown 
residential real estate, it's consistent with, I think, the 
overall direction of the economy that certainly President Obama 
has laid out--we want to be more energy efficient, have less 
traffic, and the like. With respect to the TARP, which is after 
all what brings us here, do you have thoughts as to what steps 
could be taken to make it more likely that projects that are 
economically beneficial are going to create jobs, steps that 
could be taken under the TARP to make that more likely? And, in 
doing so, I would hope you could respond to that question, I 
hope you could respond with a specific reference again to what 
the problems are. Mr. Barry, you said the problem is not the 
creditworthiness of the developer, but some other problem. 
There has been some talk about both the broader economy and the 
question of whether, say, the CMBS markets function and the 
like. So touch on what you see the problems are and then what 
the Treasury Department could do using the TARP that could be 
responsive, including their work in TALF or whatever comes to 
mind.
    Mr. Barry. Well, I'd like to take that one more time. I 
don't know what the answer is. What I can tell you is that we 
get the impression that there is blockage. That whether it is a 
capital problem, a liquidity problem, or a direction that the 
banks do not want to take--but any more real estate, regardless 
of what type it is, they don't want to make any deals.
    Mr. Silvers. Now, what size bank are you talking about 
when----
    Mr. Barry. Well----
    Mr. Silvers. When you're looking for financing, who do you 
start with?
    Mr. Barry. Well, the St. Louis deal was a 150 million, and 
most of the other FBI facilities that are under a lease to 
build, they are in the 55 million range. As such, we go to all 
the top banks in the country.
    Mr. Silvers. And they're not lending?
    Mr. Barry. They're not willing.
    Mr. Silvers. Others?
    Mr. Olasov. It's probably worthwhile to put some parameters 
on this. If we look at who holds commercial mortgages right 
now, and obviously that springs from the original source of the 
lending. You've got 3.4 trillion. Of that, you've got about 1.3 
trillion in commercial mortgage banks. You've got another 700 
billion in CMBS. You've got about a quarter of a trillion 
dollars in life companies and then the GSEs and pensions and 
others kind of play into that. So, obviously, the commercial 
banks have been the largest source of commercial mortgage 
lending over time apart from the multifamily market that Mr. 
Stockert was talking about before.
    Now, let's take a look at where we are. Life insurance 
companies are actually back in the market. There's a certain 
kind of life company product that they might be allocating 30 
billion dollars to what might be a four to five-hundred-
billion-dollar ask this year. Commercial banks are shrinking 
their commercial real estate portfolios for lots of very 
obvious and justifiable reasons, including regulatory 
pressures, and, again, the preservation of regulatory capital.
    CMBS might see ten billion dollars. It got up to 230 
billion dollars in 2007. That's not going to be the source of 
lending. So we have to go back to commercial banks, which puts 
it back at the feet of TARP and COP. The way to get there, in 
my estimation, is to start with what motivates banks to lend or 
not to lend, which is the preservation of regulatory capital. 
And that's why the white paper that I have addresses the 
opportunity to allow banks to start stripping out problem 
loans. And in the presence of those problem loans, they are not 
going to continue to lend--for all the vagaries that we 
discussed before.
    Chair Warren. Thank you. I just want to stay on time, but I 
hope we can come back to this. Let me just say for those of you 
who may have noticed. We had originally scheduled this hearing 
for ten to 12:00. I think this is very valuable. If you can 
stay a few more minutes, what we'd like to do is finish this 
round of questioning and then do a lightening round, one more 
round of short questions. And then we want to be able to take 
comments from anyone in the audience who would like to come 
forward. We're going to have to keep them very brief, but we'd 
like to do that. So I hope we can get everyone out of here in 
maybe about 15 minutes, ten or 15 minutes. But if you can bear 
with us, we would be grateful for that. Mr. McWatters?
    Mr. McWatters. Thank you. Tell me about your access to 
foreign capital, through either U.S. managed hedge funds or 
other sources, and specifically what role FIRREA has played for 
an investment in the Real Properties Tax Act, and also some of 
the other restrictions that may be placed upon potential 
foreign lenders who make loans in the U.S. Any thoughts?
    Mr. Barry. The one FBI facility that we're very close to 
getting done is with a Swiss institution providing a letter of 
credit. Through investment banking, selling bonds, and using 
that letter of credit as collateral, we're real close.
    Mr. McWatters. Okay.
    Mr. Barry. And we're beginning to see some of that. We went 
had long, long conversations with the Japanese, similar 
conversations. They're not quite ready. It didn't happen, but 
we spent several months with them.
    Mr. McWatters. And there have been no discussions with 
sovereign wealth funds or hedge funds?
    Mr. Barry. No.
    Mr. McWatters. Mr. Elliott, any thoughts?
    Mr. Elliott. I think they are impacted with the same 
fundamentals that U.S. banks are, which is until there is a 
reasonable return or they can price themselves in a way that 
would be attractive for a developer to get a return, they are 
not going to get in the market.
    But being responsive to your question of whether there are 
regulatory issues that they face, I haven't seen that. That's 
not suggesting they don't exist. I just haven't seen it.
    Mr. McWatters. Okay. Mr. Burnett, I assume you don't have a 
response, but Mr. Stockert?
    Mr. Stockert. We really haven't encountered a lot of 
international capital confidence.
    Mr. McWatters. Well, are you involved with the REMIC rules? 
They have been liberalized lately, making them a little more 
user-friendly, but they still seem to, at least what I've heard 
from some people, impair the flow of capital.
    Mr. Olasov. We deal extensively with special servicers and 
CMBS. I'm getting ready to go out to Las Vegas to moderate a 
panel with them. And they consider the liberalization that came 
out of the IRS back in September to be a complete non-event.
    Mr. McWatters. Okay. That is what I've heard also. How 
would you suggest modifying those rules, the REMIC rules?
    Mr. Olasov. Well, it doesn't lend itself to a 30-second 
schedule. I'm not--honestly, I'm not sure that--that the REMIC 
restrictions are what ties up the special servicers. I don't 
think that it particularly ties their hands in seeking the 
highest NPV resolution.
    Mr. McWatters. We've heard a lot about special servicers 
and conflicts of interest and the like. What's your perspective 
on that?
    Mr. Olasov. Again, I'll try to keep this brief, but you're 
raising some very fraught topics. I would say that there was a 
bargain made really going back to the RTC days that kick 
started the new CMBS market. That in bulk, the alignment of 
interest between special servicers and B-piece investors, those 
bond investors holding the riskiest piece of the CMBS, was on 
net a good thing, not withstanding the conflicts.
    In retrospect, I think a lot of people would argue that 
moving the discipline, of those B-piece investors out of the 
CMBS through CDOs, collateralized debt obligations, where they 
fervently took their equity off the table, should be 
reconsidered.
    Mr. McWatters. Okay. Thank you. My time is up.
    Chair Warren. Thank you. Mr. Neiman.
    Mr. Neiman. Thank you. My question goes to Mr. Burnett. I 
am very interested and appreciate your candor with respect to 
the receipt of TARP capital and the experience that you had. I 
would like to have a clear message, though, as to some 
recommendations that you gave to us with respect to the use of 
TARP funds for community banks. I'm getting a sense that you do 
not feel that TARP has been sufficiently responsive to the 
needs of community banks. At our last hearing with Secretary 
Geitner, we pressed him on the details of the October program 
they announced, which was specifically directed to community 
banks and tied to specifically to small business lending. He 
responded that there was a reluctance from those banks to 
participate because of a stigma. Could you talk about the need 
for additional TARP funding through capital programs and how 
can it be changed, if you do support those, in order to make it 
more receptive to bankers?
    Mr. Burnett. Well, I think that any time that private 
capital is available versus public capital, as a business 
person, I would choose that route to benefit the taxpayers. 
However, I think that at this point, public capital, at least 
in our sector of the industry, is simply not available from 
institutional levels, and there are numerous reasons for that. 
One of those is primarily--we've now created a system of shelf 
charters where a charter can be obtained and then capital can 
be raised from institutional investors to buy failing banks 
with FDIC assistance. I've had numerous institutional partners 
say, why would I invest in your bank, when if I hang around 
long enough, I may pick you up with an 80 percent agreement? So 
those sorts of transactions have taken public capital virtually 
out of the market.
    That and the general concern on what the future of smaller 
banks is. I think Secretary Bair has said openly addressed the 
number of failures forthcoming. And investors don't know what 
to expect from Washington, in terms of closures this year or 
next year, so they are sitting on the sidelines.
    So it is perhaps TARP that may be the only source of 
capital for banks in our sector. If you look at TARP across the 
board, I believe about eight percent of all U.S. banks receive 
TARP. I think there were 26 here in Georgia.
    Mr. Neiman. If you would support seeing an expansion of 
those programs for community banks, how would you change the 
program in order to implement it more effectively?
    Mr. Burnett. I would support seeing an expansion of the 
TARP program. I think, in all candor, the conditions are going 
to have to be changed. I know in our case a year ago, when we 
applied our company was in better shape than it is today, but 
because community banks were put at the very bottom of the 
stack of the applications by the time they got to any of those 
banks, the deteriorated banks no longer met the standards.
    Mr. Neiman. So, recognizing the limitations on raising 
private capital in this market, how would you describe the 
reluctance of community banks to participate in TARP programs, 
particularly the October program announced with respect to 
small business lending?
    Mr. Burnett. In all candor, in my circles, I have not found 
banks that were reluctant to participate. What I found in 
Georgia is the bank's applications simply were not acted upon.
    Mr. Neiman. I want to also ask Mr. Stockert. What is the 
most important message that we should leave here with respect 
to the impact CRE is having on affordable housing and any 
proposed changes that we should be recommending to Congress or 
the Treasury to address those concerns on the impact on 
affordable housing?
    Mr. Stockert. Well, very clearly, and I said in my remarks, 
we feel that preserving the GSEs that are providing the good, 
sound, liquid financing to our industry is very important. And 
beyond that, we don't really deal with affordable housing per 
se, but I certainly can get you some more information on other 
suggestions we might have in that realm.
    Mr. Olasov. Excuse me, Superintendent Neiman, I feel very 
forcefully about this, and I just wanted to support on very 
strong terms what Chris was talking about. And, obviously, 
there are some alternatives, in terms of promoting community 
and regional banks and attracting new capital. We've had a 
number of discussions with the FDIC. I think Mr. Atkins talked 
before about the ``F'' word, forbearance. I know that's a bad 
term, but at the end of the day, the FDIC is chartered to find 
the least cost resolution. If you take a look at a 140 bank 
failures last year, the estimated losses against total assets 
was 25 percent. We've reached out with a number of institutions 
to find some form of matched funding where possibly open bank 
assistance could be provided along with investment on a 
subordinated basis. That's in conjunction with what one of your 
previous witnesses, I think Charlie Calomiris, talked to you 
about--the need to put public subsidies in a senior position to 
private capital. Not being able to do that means that you're 
going to restrict new private capital coming into banks, and 
everyone agrees that the banks need to attract new capital.
    Mr. Neiman. And doing that through FDIC programs.
    Chair Warren. So let me just follow up in a slightly 
different direction on this same question. I think part of the 
question we are trying to ask is what works best to get new 
money into good projects, whether it's refinancing the existing 
projects or it's trying to finance new construction. And we've 
heard a lot about the extend and pretend softening with 
accounting standards and so on. We talked about loss 
recognition and the problems associated with loss recognition. 
I want to start with you partly because of your written 
testimony and what you've been saying here today, Mr. Olasov, 
but we're going to be short on time. But do you want to take 
one swing at how we should be thinking about that problem? How 
do we get the money in the banks, and then out of the banks 
into the projects?
    Mr. Olasov. I think that it all starts with cleaning up 
balance sheets. If you take a look at bank crises around the 
world, we've got some very good examples of what happens when 
there are not deliberate actions taken. Japan, obviously, is 
always a hot topic. And I remember meeting in mid 1990s with 
the Japanese DIC, where year after year we would go through 
this same dance with them that never led to any kind of 
outcome. It all had to do with papering over the problems with 
the Japanese banking system. My fear is that we're going to 
prolong the agony unnecessarily by not dealing with the removal 
of problem assets in a way that does not necessarily entail 
impairing regulatory capital.
    Chair Warren. Thank you, Mr. Olasov. Mr. Stockert.
    Mr. Stockert. Similarly I would say make sure the rules are 
clear. If we all know what the rules are, we can figure it out. 
And then the second thing is facilitate price discovery, 
because that's what we're all saying. I don't think that that's 
fully baked in at the banks. I think that's the big bottleneck. 
Going back to the affordable housing question for a minute. The 
housing policy in this country has got to be more balanced. 
Multifamily apartments are affordable housing, all of them. To 
live across the street at Post Biltmore, you cannot buy a 
single family or condominium for anything like what you can 
rent one of our professionally run, well-appointed apartments. 
So balance the housing policy.
    Chair Warren. Thanks very much. I'm out of time. Mr. 
Atkins.
    Mr. Atkins. Well, it's too bad, I mean these are some 
important issues that we're talking about here, liquidity and 
capital issues. Ironically, of course, TARP was set up to buy 
troubled assets, but many of us at the time thought that was 
going to be impossible because of the valuation issues, 
regulatory ramifications, and just human nature. And so the 
public-private partnership is more of a battle still because of 
those basic issues. So how do we solve this morass, which is 
essentially what it comes down to, banks holding onto assets 
and not wanting to sell them? Mr. Olasov, or others, I was 
wondering if you had any quick suggestions?
    Mr. Olasov. Yeah. In fact, I was invited to talk to the OCC 
about CRE problems a couple of months ago. And I said, by way 
of establishing my bona fides, that I am an enormous proponent 
of fair market value accounting, but--and this is important--I 
think the hole that we're in is so deep right now. We can talk 
about numbers later on offline. I'd rather not talk about it 
online, to be honest with you. I think the overhang of debt in 
both the residential and commercial markets is so chilling that 
we're going to have to start looking at some kind of deferred 
loss accounting.
    Mr. Atkins. Those are fighting words.
    Mr. Olasov. I say that very reluctantly.
    Mr. Atkins. Anyone else?
    Chair Warren. With that breathtaking thought, maybe we 
should go to the next question. Is that all right?
    Mr. Atkins. I'm out of time. Yes.
    Chair Warren. Mr. Silvers.
    Mr. Silvers. Just to show you how much in sync I am with my 
friend Mr. Atkins, I want to put this in language that a 
listener might understand. Mr. Olasov, if we were to take these 
troubled assets off of bank books, as you're suggesting we 
must, and you mentioned Japan. I don't think it's possible to 
repeat that problem too many times. If we're going to do that, 
not at the prices in March 2009 but at today's prices, what 
would the solvency of our banking system look like?
    Mr. Olasov. I actually don't think that it would be prudent 
for me to answer that online, to be honest with you.
    Mr. Silvers. All right. Well, the reason why I raised it--I 
invite others to comment--it strikes me that when we talk about 
a capital problem, what each of you and what our prior panel, 
much to my surprise, seemed to be saying, is that we just don't 
have enough capital in our banking system for the assets of our 
banking system to be deployed properly. Now, I'm not speaking, 
obviously, with respect to any particular bank, but across the 
system that seems to be the case, and I think we've heard this 
over and over again. And so what I pose to you all is we need 
to get these assets off the books, and do so at any realistic 
price--and I remind you, we've got 160 billion dollars in 
unallocated TARP assets. This would be if we're going to do 
something in TARP. That's for the entire financial system. It 
suggests that we're just looking in the wrong place. It 
strongly suggests to me, at least, that you can't have this 
conversation without talking about restructuring the 
liabilities on bank balance sheets. There's no other way out. 
And this is actually where Japan ended. And I invite any 
comments before my time is up.
    Chair Warren. No, you don't. Your time ran out.
    Mr. Silvers. My time ran out.
    Chair Warren. We're going to get there and we are going to 
do some comments. That's why I'm trying to be disciplined about 
this. Mr. McWatters, before I call you for your two minutes, 
I'm going to say that I very much appreciate each of you 
coming. I appreciate this. I wish I could stay and hear the 
rest of the panel. Like everyone else, I am at the mercy of 
Delta Airlines and an obligation back in Boston that I must get 
back to. Since the rest of the panel will still be here, I'm 
going to hand the gavel over to the deputy chair. I will watch 
the rest of this on video. But thank you very much. I wish I 
could stay and talk about this. Not just for the rest of the 
day, but for the rest of the month. Thank you.
    Mr. McWatters.
    Mr. McWatters. Thank you. Each of you have described 
problems, and that's basically what we've heard today. We 
wouldn't be having this meeting, if there weren't problems. If 
you can take two sentences, three sentences each, what's a 
solution? The succinct, almost sound bite type solution to the 
regulatory problems, accounting problems and the like, if 
that's possible.
    Mr. Barry. Let me just start with kind of a broad 
statement. Somebody mentioned a soft landing for the commercial 
real estate industry. We see the focus on the taxpayer, 
rightfully so. We see the focus on the banks, on residential 
moratoriums, mitigations as opposed to foreclosures. But the 
general feeling that the banking community gives us is that we 
need some love. We need banks to understand the problems that 
we have. We need the banks to also understand the potential of 
what we bring to the table. When I go back over the investment 
dollars that we channeled into communities, when I think of the 
jobs that we created in the overall economy, what we do as 
commercial developers is very positive. But the commercial 
world is in trouble and taking everybody down, and that's an 
awful lot of people. I must say that most of them are in the 
single family development side as opposed to the commercial 
side. But the commercial real estate world is in a world of 
hurt. And if there's a way that you could think about how to 
give some help to the commercial developers, it would be great.
    That wasn't the answer you were looking for, but time has 
expired.
    Mr. Neiman. I'd like to go back to our discussion 
particularly with the first panel regarding the CRE guidance. 
And I'd like to give Mr. Burnett an opportunity to respond and 
maybe some of the developers and others on the panel as well. 
How do you assess the impact and the effectiveness of that 
guidance, if the intent was to encourage banks to restructure 
CRE loans and to take write downs where required? Will it meet 
its objective? Is there other guidance or regulatory action 
that's needed?
    Mr. Burnett. I am pleased with components of the CRE 
guidelines. I do think that they will allow us to deal with our 
problems more prudently. Someone had used the term ``kick the 
can down the road.'' Well, right now, if you didn't kick the 
can down the road and you truly wrote property values down, we 
don't know the depth of the capital hole. But if we believe 
that our markets are going to recover, and as long as those 
borrowers can continue servicing the debt even if it's through 
restructuring, then it is better to move that problem down the 
road as long as we have appreciating property values. And I 
think that's the real key determinant, do you have properties 
that are depressed today because of the situation we are in, 
but in the long term are still are viable, valuable assets.
    Mr. Neiman. Does anyone want to comment on that?
    Mr. Elliott. I think it's a positive step in that it allows 
the property to stay in the hands of good sponsors. I think 
maybe you made a point earlier about one danger of not good 
sponsors is actually accelerated deterioration of assets, which 
is not a good thing. So I do think it's good keeping the 
property in the hands of good sponsors. It's not doing anything 
on prompting new loans though.
    Mr. Neiman. Thank you.
    Mr. Silvers. Well, with that, this panel is excused. We 
very much appreciate your willingness to stay a little longer 
than we had promised. And if there are members of the audience, 
the Congressional Oversight Panel makes it a practice in field 
hearings to invite comments from the audience. Please limit 
your remarks and questions to one minute. There is a microphone 
up front. Please walk up to the microphone and introduce 
yourself.
    Mr. Moore. My name is Ray Moore, and----
    Mr. Silvers. Just give these folks a chance to get----
    Mr. Moore. I was hoping these gentlemen would stay and 
listen. I would suggest they stay and listen. My name is Ray 
Moore. I've been in the commercial real estate business for 35 
years. And I've sat here and listened to these gentlemen cry 
about their particular problems. What they are doing is crying. 
I would suggest to Mr. Barry that when the project was going 
very well, Mr. Barry could have paid for that land and had 
equity in that land, and we wouldn't be here. I called Senator 
Johnny Isakson, the individual who empowered this board. He was 
the one that made it. He spent 21 million dollars of our 
taxpayer's money for you guys to come out, and I would suggest 
that what you all are doing is you are looking out here at the 
symptoms. And you are hearing all of the problems. You are out 
here at the symptoms. We need to go back and understand. I 
thought what this board was going to do--I inquired to get on 
this board. I was told that I did not have the national 
reputation to get on this board. It would have been very short 
because the problems we're facing today started back in 1999 
with Fannie Mae and Freddie Mac by pressure from Congress and 
the administrations ever since to implement social programs.
    Mr. Silvers. Sir, your one minute is expired. Do you want 
to wind up?
    Mr. Moore. I would like to say this. This is a situation 
where you guys are supposed to be looking at why we got here, 
not looking at the symptoms out here. You are supposed to look 
at the reason. The reason--if you go back and see the reasons--
--
    Mr. Silvers. Sir, I would ask you to wind up. We mean it 
when we say one minute.
    Mr. Moore. If you look at the reasons why we get here, it 
becomes obvious to the problem. What they have done is they 
have overleveraged. These individuals----
    Mr. Silvers. Sir, I've asked you for a third time. Please 
sit down.
    Mr. Bowers. I'll try to keep my remarks to one minute. I 
would love to write you all a letter. I am Richard Bowers. I 
have a firm Richard Bowers & Company. I own downtown properties 
and suburban properties. I lost a property that was a 
commercial mortgage-backed security. I paid on time every time 
for ten years, couldn't get it renewed. So that's very 
disappointing. I really believe this economy was created in 
September of 2007, when virtually all liquidities stopped in 
the marketplace. And from that point on, from a brokerage firm 
and from singular developers, there was no liquidity. Demand 
couldn't be served. That is the sale of real estate. Values 
went down. In fact, it was like getting thrown off the top of 
your building. And employment went down because businesses 
couldn't get their funding or lines of credit extended. So what 
we've created is the greatest devaluation in personal wealth 
ever, the highest unemployment, which is a lot higher than ten 
percent. And the greatest debt per capita that we've ever had, 
I guess, in the world. I do believe that liquidity is the 
answer for the market, and there is none at least from where I 
sit as an entrepreneurial property owner. We go to these 
banks----
    Mr. Silvers. Sir, I have allowed you to go over as a 
speaker, but if you want to wind--if you've got a final----
    Mr. Bowers. Well, I mean, I don't believe there's liquidity 
in the marketplace despite what some of these people say. The 
regulators have been over-scrutinizing the banks in my opinion, 
or the banks are afraid to make loans to reputable businesses 
and business leaders. I also believe that a lot of this could 
have been much better handled than it was and still might be 
satisfied if liquidity could be provided. But I really do 
believe that either through tax benefits or government 
underwriting of some commercial loans, either go back 15 or 20 
percent, but some of this could be avoided. Otherwise, you are 
just going to end up bankrupting every entrepreneurial real 
estate owner, in my opinion, that has a loan turnover in this 
country. Thank you.
    Mr. Silvers. Thank you, sir. Sir.
    Mr. Boyd. My name is Bob Boyd. I'm a commercial real estate 
investment broker. We have a large amount of capital looking 
for opportunities. And we have dealt with a majority of the 
Atlanta banks over the last two years looking to buy toxic 
assets. The difficulty in making those deals happen is a 
function of the asked price versus the bid price. And the 
inability of the banks to release those assets to buyers who, 
in most cases, would pay all cash to buy those opportunities. 
As long as that continues, those opportunities don't present 
themselves to the marketplace. In addition, once a bank is 
taken over by the FDIC, that very same asset that has been part 
of our target in the marketplace that we understand, goes to an 
FDIC pool where it's completely lost in some pool purchase and 
as a result is sold at a much lower value than what our 
original offers have been. And that continues to be a problem.
    Mr. Silvers. Thank you. Is there anyone else who wishes to 
speak?
    Mr. Atkins. I just wanted to respond to--I would love to 
talk offline with the gentleman who spoke at the beginning. But 
just to clarify this panel here is charged with overseeing 
what's happening with the TARP program. There's another 
commission, the Financial Crisis Inquiry Commission, which is 
looking at the origins of what happened. I happen to agree with 
you that Fannie Mae and Freddie Mac actually are probably a 
huge problem obviously in the residential mortgage area as well 
as the commercial area. But you know that is not necessarily 
what we are dealing with here. But I don't want to open----
    Mr. Moore. I didn't realize that this was a separate group. 
He asked his question. I would like to respond to it. I would 
just say that TARP funds need to be used to create jobs. Our 
whole economy is kept up--it's like a balloon. Not everybody 
breathes confidence in it. All of our citizens breathe 
confidence in this big balloon. And so we need to get 
individual citizens breathing confidence back in this balloon 
and the problems are solved. Use those funds in there to get 
jobs to people out here. They are worried about jobs. Job 
creation is what this needs to be about. And the TARP funds 
don't need to be--these guys make mistakes. Real estate is a 
cyclical business. The bankers keep doing the same thing over 
and over. The developers keep doing the same thing over and 
over.
    Mr. Silvers. Everyone who spoke had a time limit. I very 
much agree with your comments, but everyone who spoke had a 
time limit. Let me just say that--I can't speak for the other 
panel members, we each have our own travel plans--but I'm 
available. I suspect maybe other panelists are available too to 
continue offline these conversations. We do have time rules, 
and it's only fair to stick to them.
    On behalf of the Congressional Oversight Panel and our 
Chair Professor Warren, I wish to thank Georgia Tech for their 
hospitality and help and call this hearing adjourned.
    [Whereupon, at 12.35 p.m., the hearing was adjourned.]
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