The Government Should not Change the Rules

For those of you who are golfers, you will appreciate the following tale.

I was playing my first round of the year this past weekend and thought I was having one of the best rounds of my life. I warmed up on the range for an hour before I teed off and spent another thirty minutes on the practice putting green. I approched the first tee and launched a drive 275 yards right down the middle of the fairway. My approach shot landed 5 feet from the pin. I walked up the fairway looking around at the trees and the blue sky and feeling like “Wow, this is great”. I stepped up to the ball and confidently sunk my 5 footer for a birdie on #1.

The round continued, in pretty much the same way, for the rest of the afternoon and, after 15 holes, I was even par. Boy, I felt great. A beautiful day, a fantastic round, life was good. Then, on the 16th tee, I was approached by the Starter, who is the policeman of the course. It was not Harry, the usual Starter on Saturdays, but some guy with  “DC” on his golf hat. As he approached he said, “Hi, I’m from Washington and I’m here to help”.

I was perplexed by his approach and even more so by what DC started to tell me.

He said that, although I may have thought I knew what the rules were, they had been changed. It did not matter that DC was actually involved in writting the original rules and voting on the rules to make them valid. The rules were now changed. “How could the rules change in the middle of my game?” I asked. He said, “I am DC, and I can do anything I want”.

DC went on to tell me that under the new rules, (which were formulated because I was having such a good round) each time I hit my tee shot in the fairway, I was penalized one stroke. Each time I put my approach shot on the green, I was penalized one stroke and each time I sank a putt on the first try, I was penalized two strokes. If I hit the ball into the water or into a bunker or off the roof of the clubhouse, I could deduct one stroke from my score. After the recalulation of my score, it turns out that my scratch game (even par) equated to a score of +38. Moreover, my score is to be posted on a nationally advertised website, national tv advertisements and multiple print ads in national publications. Additionally, politicians go on tv and revel in saying how badly I played even though I did not know the new rules they created after the fact.

People who think my score stinks, blog about how much I suck, harass my kids at school and a bus load of crazy people show up at my house in the suburbs with hurtful signs and chant profanity at my family. Would you like this to happen to you?

This is what the government has done to AIG employees. The government passes legislation which provided for “bonuses” to be paid to employees. After these knuckleheads read the legislation they passed, (why read the stuff you actually vote on?) they decided they were wrong and wanted to tax these same bonuses they approved to be taxed at 90%. And if you took TARP money, the government now, after you took the funds with “no strings attached”, decides that you can’t pay employees what they are worth. Who cares that these rules will eliminate the possibility that you can pay back the $173 Billion you received from the government, we don’t want you to give out 1% of that to keep the very people that will enable us to pay that money back. How can you trust this government?

The real estate industry has been hopeful that the TALF and its PPIP would stimulate the secondary market for CMBS and, therefore, make the availability of credit more abundant. TALF 1.0 was supposed to create $250 billion of transactions in the asset backed security market. The first auction raised $4.7 billion. The second raised $1.6 billion. Hardly a success. Why?

Who can trust the government to not change the rules in the middle of the game? I have many clients considering participating in the PPIP but they ALL feel like they would be taking a big risk that the government will screw them if they end up making large profits. Will the president villify those making big buck, will the House tax these profits at 90%, will people in busses show up at the homes of the employees of the companies profiting from this program? Who wants to deal with this?

The TALF and the PPIP will not hurt our commercial real estate market. The question is, Will they help our market? The jury is still out on this. If the government can’t make rules and stick to them, the programs will surely fail. Investors will not play a game in which the rules might change after a commitment is made.

Our market participants need to get credit for a birdie. Don’t change the rules after people have put their faith into the program.  If no one plays, no one wins….