On July 21, 2010, President Obama signed into law the Dodd-Frank Financial Reform Bill. The two questions that come to mind for me are “Can you legislate against greed or stupidity?” and, “If you could, why would you want to?”

The upshot of the law is that there is a tremendous amount of discretion left to the regulators in how they ultimately define and then implement the new rules. Further, this means that the industry has tremendous opportunity to influence the outcome of the final rules and ultimate implementation over the next nine months. That said, uncertainty remains in the minds of investors as we move from a legislative risk removed to the unknown regulatory risk that is coming.

While many across the industry pine for more capital availability, my worry is the lack of transactions, not the lack of capital to execute them. For those who perceive CMBS 2.1 as the manna from heaven, the risk retention rules which have to be converted into regulation and implemented will very much define the structure for securitization going forward, as well as how much capital ultimately returns to the real estate asset class. For those interested in the fine print of the law, the expected timeline is 1,000 days until a clear set of rules are converted to regulations and implemented.

The other part of the law that relates to our industry relates to the Credit Rating Agencies. It covers oversight; separation of sales and marketing from the ratings; a to-be-commissioned study on how the actual rating agency is assigned to a deal (resolution of the imbedded conflict of the “issuer pay business model”); and new liability taken on going forward by the rating agencies themselves. Yes indeed, the rating agencies will definitely be more cautious and tenuous in their go forward role in CMBS 2.1.

Lastly there is worry by some that the Volker Rule (a ban on proprietary trading) will somehow be interpreted to include CMBS.

I still feel that our country’s legislative process has missed the point of the failure of the banking system – that the top 19 banks are not where 85% of the commercial real estate assets reside; rather, it’s in the broad list of local community and smaller regional banks’ balance sheets. And, other than the new powers the FDIC has been given to wind down financial-like institutions, the law seems to have missed the core area that (other than job growth) most greatly affects our industry.

A dysfunctional Congress laced with high acrimony, lobbyists advocating for special interest, representatives playing to populist sentiment (that is mostly special interest and uninformed) perpetuates a broken attitude of scarcity when we need thoughts of abundance to pull us out of the beginning of our own “lost decade”. The government continues to play a massive game of “extend and pretend” with a very sick banking industry that is forcing no sales and no market price discovery at a time when the FDIC is the only real bulk seller of assets.

By Jack M. Cohen
July 26, 2010