At 5:38am on Friday June 25th, Congress finished up their proposed legislation for Financial Reform. Since then, I have looked eagerly at what the media had to say about the efforts of Congress. I remain disappointed.

 We had an opportunity to change, to really make a difference, and set the economy and financial superstructure for the commercial real estate industry on a stable course. We really missed the mark on the banks. It is said that 85% of the commercial real estate assets domestically are held on the top 18 banks – the remaining banks – regional, local, and community are holding the rest. By anecdotal evidence, adverse selection (given the growth of CMBS) drove the accumulation of those real estate assets on the balance sheets of banks that were ill-equipped to understand or deal with the risks of these relatively crappy investments. The country now pays for the stupidity of the efforts of the “Last National Bank of Who Cares.” The “extend and pretend” mantra has become strategy for the lending institutions large and small. Instead of facing reality our collective heads are buried in the sand.

Highest Priority: We need transactions in the marketplace. My friend Arthur Segel, a noted professor at Harvard Business School and a former real estate investor, has made the best suggestion yet that I have heard regarding the banking community. 1) Require banks to keep 20% of their investment and sell off the remaining 80% in equal amounts over 5 years. 2) Exempt these transactions from being used in valuing the transacting bank’s portfolio for 18 months. 3) Limit loan extensions to not more than one year for all but the healthiest banks

We as a country need smart people helping make real decisions not overwhelmed politicians making populous decisions which favor local siloed agendas. We as a country must de-lever – but this will take time (and pain) and we need Political leadership to address long-term entitlements.

Otherwise, Japan’s lost decades will become our future. I'm disappointed and mad.

By Jack M. Cohen
July 7, 2010