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….

14 Responses to “The Government Should not Change the Rules”

  1. 1 Abe Hedaya April 22, 2009 at 9:42 am

    “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?”

    Bob, Though I agree with you regarding the government’s actions on the AIG bonuses, I’m not so sure a lack of trust that the game will remain constant is what’s stopping people from participating in the TALF program. I think it has more to do with the government’s perceived lack of ability to be a good investor. Though, as I understand it, the government would be sharing a disproportionate amount of risk on the investments it makes (, I still would rather put my money in to specific investments which I understand, not some huge government fund created to please a public complaining about the rampant use of public funds to bail out companies.

    In other words, as an investor, I’d be far more comfortable purchasing physical buildings and individual notes.

  2. 2 rknakal April 22, 2009 at 12:37 pm

    Hi Abe, thank you for your post. I agree with you that most investors would rather own and control buildings and individual notes as they have a more tangible quality.

    Whether the government is a good investor or not is an issue that takes a back seat due to the proposed structure of the investments. The government will provide 50% of the equity and all of the debt to the investing partnership. The private sector investor has losses limited to their 50% equity investment so the government is bearing a disproportionate share of the risk. Some groups will be interested in participating because the potential profits are significant. In the back of their minds however, has to be the thought that they could be criticized for profiting. If the profits are too large, they could be viewed as greedy bad guys. The “redistribution of wealth” mantra that Washington is driving home every day is a problem for the capitalists who these programs are aimed at. It will be interesting to see how the private sector handles these issues.

  3. 3 Mike Beatty April 22, 2009 at 3:02 pm


    You’re spot on. Money goes where it is appreciated and where there is a stable political environment. Nobody wants to invest in a company or an asset where there is political instability. Nobody invests large sums of money in places like Venezuela because they know that at the drop of a hat the govt could nationalize the investment and they’d lose all the invested capital.

  4. 4 Ron Winter April 22, 2009 at 3:10 pm

    A partnership is a marriage without sex! Who in their right mind would want to partner up with the US govt. With the outspoken goal to make this country much more socialistic they will not be interested in making any individual or group wealthy.Feinstein just awarded her husbands company a $25 Billion contract, Pelosi spends $5.6 Mill on jet fuel on her 200 passenger jet so she doesn’t have to stop between DC and CA. And they think we would want to partner up with the likes of that. Buy your own real estate and enjoy it while you can. They will take the real estate away from the individuals right after they take our guns.Sorry no investment from me!!

  5. 5 rknakal April 22, 2009 at 3:12 pm

    Hi Mike, Thanks for your post. I hate to equate the US government with Venezuela but their actions have been erratic and questionable. If only politicians could focus on doing what is right without having to worry about getting re-elected. Unfortunately, that is not the way the system works.

  6. 6 rknakal April 22, 2009 at 5:13 pm

    Hi Ron, Thanks for your post. I believe most investors will feel the same way you do. That is unfortunate because we need to get CMBS, in one form or another, operating again. The government will reap what they sow and it will be an embarrassment if this potentially trillion dollar initiative falls far short of its mark.

  7. 7 bobgreenfest April 23, 2009 at 9:10 am

    The Government has a history of changing rules for issues such a retirement plans, college savings plans, health benefits, inheritance taxes, etc. Therefore, as you state, why would anyone in their right mind not expect the Government to change rules mid-stream and hinder what may have been deemed to be a good practice or policy.

  8. 8 rknakal April 23, 2009 at 1:38 pm

    Hi Bob, Thanks for your post. Time will tell but many feel as you do.

  9. 9 Jeffrey Pliskin April 23, 2009 at 3:06 pm

    Bob, nice post. Funny how the Fed government is not vilifying any of those at Freddie or Fannie who got retention bonuses, even the poor guy that killed himself, he had been there for 16 years. Also, why do people in the government get raises? It is beyond frustrating that our politicians attack business people and blame them, mostly, for our economic problems. Do they ever look in the mirror? Can they at least acknowledge that the people who were involved in the Tea Party protests have some legitimate beefs? They are not all just Obama bashers. And why would anyone buy an apartment building in NYC, talk about the government changing the rules. Finally, it’s obviously not just the Federal government we are mad at. Can NYS government be any worse? What is going to happen next year when the economy still stinks, we have gigantic deficits, and no stimulus money? And don’t get me started on the stimulus money. As I see it, that will go from taxpayers, to governments, to public sector and union employees and back to politicians. We will never be able to unseat the incumbents. One more thing, all tyrannies, from the Soviets to Iran, started out as class warfare and ended up as dictatorships. Is that where we want to head?

  10. 10 rknakal April 24, 2009 at 4:30 pm

    Hi Jeffrey, Thank you for your post. To answer your question about why government employees get raises even though others are having compensation cut or jobs eliminated, I would like to mention a couple of things. Many people are not familiar with the fact that in 1978, title VII of the Civil Service Reform Act established into law a system for federal employees to form, join, or assist any labor organization. This portion of the code is referred to as the Federal Service Labor-Management Relations Statute. The American Federation of Government Employees is the largest federal employee union representing 600,000 workers. People who work for Treasury are members of the National Treasury Employees Union. The current adminestration is indebted to unions and this is evident in the way the auto industry has been dealt with. The Chairman of GM was forced to step down. Why didn’t the head of the UAW suffer the same fate? Are they not both responsible for the fate of the ailing company?

  11. 11 Greg E Schecher April 27, 2009 at 2:09 pm

    There is a method to assist the private sector in accepting risk concerning the purchase of toxic assets. CUT CAPITAL GAINS to 5% in the case of profits derived from the sale of these assets! In addition reduce taxes to 5% on income derived from the sale of assets as a “dealer”. Provide the purchasers a participating first mortgage courtesy of the Fderal Goverment, as values increase the lender participates in the appreciated value. LTV at 80%. Sell participation in these loans with a first loss gurantee of the top 10% and watch the fun begin.

  12. 12 rknakal April 27, 2009 at 2:57 pm

    Hi Greg, Thanks for your post. I like your idea but cutting taxes for those with the capital to make these investments would be taboo for this adminestration. That would not allow for enough redistribution. Perhaps they could say that the rate will go down to 5% and then after billions are made “on the backs of the taxpayers” the House will vote to tax the profits at 90%. You gotta love the old bait and switch.

  13. 13 Bucky April 29, 2009 at 8:28 am

    Unstable political environements make for banana republics. DC interference (notice I did not say regulation) in business has wrought a cabal of a labor union and foreign car manufacturer as a majority owners of an American car manufacturer. I love to see the shape of that table when they negotiate the labor contract. Q. Which side does labor sit on? A. The John Kerry side. Both sides!


  14. 14 rknakal April 29, 2009 at 8:00 pm

    Hi Bucky, Thanks for your post. It will be very interesting to see what happens with the auto makers or “The Hopeless Three”, as a friend of mine refers to them.

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