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 

( 

Available on the Internet: 

http://www.gpoaccess.gov/congress/house/administration/index.html 


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COMMERCIAL REAL ESTATE 


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55–522 2010

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 

( 

Available on the Internet: 

http://www.gpoaccess.gov/congress/house/administration/index.html 


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(II) 

CONGRESSIONAL OVERSIGHT PANEL 

PANEL MEMBERS

ELIZABETH WARREN, Chair 

RICHARD H. NEIMAN

PAUL ATKINS

DAMON SILVERS

J. MARK MCWATTERS


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(III) 

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 


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(1) 

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 acaVerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 E:\HR\OC\A522.XXX A522

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demic 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. 


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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 middleclass 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. 


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The Chair calls on Mr. Atkins, if you’d like to make some opening remarks. 

[The prepared statement of Chair Warren follows:] 


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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 


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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. 


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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:] 


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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, 


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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:] 


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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 


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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:] 


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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 


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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 


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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 


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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 


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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 thousandyear 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? 


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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 

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self, 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. 


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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. 


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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 

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cern 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 

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stand 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 


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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 disVerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00067 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522

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agree—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 


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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 


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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 

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ber, 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 

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uity 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 


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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. 


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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 onesixteenth. 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 


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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 


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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. 


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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, 


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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 userdriven 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 


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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 


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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. 


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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 


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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 userfriendly, 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 


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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 applicaVerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00144 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522

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tions 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? 


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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 


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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 


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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 


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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 entrepreVerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00149 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522

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neurial 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.] 


jbell on DSKDVH8Z91PROD with HEARING