Don Tishman's Real Estate Development and Investing Solutions

Let ‘s look at some recent results of the Federal regulation.  When I recall recent examples of Federal attempts at regulation, I think of Enron, Madoff, Goldman-Sachs, A.I.G., coal mines, off shore oil wells, Katrina, etc. I am sorry but these results do not  inspire my confidence in the ability of our government to protect us. Then, is no regulation by government a viable alternative?  In most cases,regulation by our government have been the result of acts that caused grievous harm to our people.  These horrible experiences must be stopped. My thought is that regulation can work.  The Federal problem is in the method of regulation. In the foregoing ill=fated attempts at regulation, the regulators had wide discretion in determining whether to act, and when to act. We can not wait for these bureaucrats. We must to limit this discretion.

If A robs B using a deadly weapon, the crime is clearly armed robbery. When A is apprehended,the defendant is then  charged, tried, and, if found guilty, sentenced according to the prevailing laws. The only discretion involved is when the defendant is sentenced. There are sentencing guidelines for the trial judge providing a minimum and a maximum term.

If there are absolute prohibitions of certain conduct, the discretion is very limited. For instance  today when an insurance company insures your life, the insurance company must set aside the reserve to pay your family  the eventual claim. Logical- But   A.I.G was able to insure the payment of billions of dollars of financial obligations, without setting aside  one penny of reserve to pay  any claims. Some of the the investment bankers that sold these financial obligations to widows, local government, etc. did not tell the buyers that the financial guarantors had no reserves to pay the guaranties. Instead the sellers  assured the buyers that this investment was risk free because of the guaranty of payment by a third party. Further after selling these financial obligation, some of the investment bankers took action that clearly demonstrated that the sellers believed the financial obligations they just sold were worthless. The present regulators were all in place when this occurred and then our  recent recession occurred. How can we prevent this horrendous losses to innocent people?

It is very simple. No one should guaranty a third person’s debt without providing sufficient assets for a reserve to pay the debt  that they have guaranteed.

Another new law would require  that in order to sell securities , the investment banker must acknowledge that the security is valid, and the seller believes that the security is a good investment. If  the seller violates this law, the buyer is entitled to treble damages and the security  license of the investment banker is revoked for at least ten years.

A very real problem arises in a specialized industry requiring the regulator to have expertise about this industry. Many of those hired for this regulation are from the industry being regulated.  Many of these so chosen, have been indoctrinated against regulation of this industry. Thus when they take the regulatory job their sympathies are with the industry they are sworn to regulate.  This is like the fox guarding the chickens. The recent revelations about coal mine regulation and the issuance of off shore drilling permits suggest these scenarios.

Many regulators leave the Federal service and become advocates for the industry they had regulated. A simple ten year prohibition against this by making any violation a felony for both the former regulator and the company that employs the regulator.   This may eliminate this problem. This would also make it difficult for a person from an industry to accept a government position and then return to the industry.

Some years ago, I was teaching real estate development courses to high level executives of the Department of Housing and Urban Development. This Department is a major financier  of single family and multifamily developments. I was shocked by these executives low level of  understanding the fundamentals of real estate development. But what they did know was the procedure that their Department used to finance these developments. This was sufficient to get the job done. This is what should  happen in fields that require special expertise in an industry. The regulator has to understand the government’s role in the regulation, not the industry.

Every time the Internal Revenue tries to halt a scheme that legalizes a taxpayer not paying taxes, the tax practitioners devise several ways around this new regulation. One solution is an absolute tax without any deductions. The opponents of this type tax say they are against this tax  because will hurt the people at the bottom of our economy.  When you look at the actual facts by determining who is paying most of the income taxes, you will find that the people with highest income pay the most taxes. and people at the bottom of the economy pay very little taxes. All this flat tax will do is have the big earners pay a higher proportion of the income taxes. It will cause temporary reduction in the income of tax “experts”. Do not shed crocodile tears for the tax “experts”.  Their fertile imagination will devise a method of lifting some of the tax burden of the very rich.

Government regulation is an evolving process. Clear prohibitions by Congress with less discretion to regulators is a way for successful regulation.

A caveat about passing these proposed  laws. Wall Street is by far the largest contributor to Federal campaign chests.