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Zell Blames Accounting Rules for Crisis

“This entire crisis could be placed on the accounting system,” Zell told an audience of more than 1,000 assembled on Tuesday at the Four Seasons Hotel. He revealed that he called Treasury Secretary Henry Paulson early this year to ask him to suspend rules forcing banks and other institutions to write down the value of their real-estate mortgage assets — both residential and commercial — to reflect the latest valuations.

So-called mark-to-market accounting, required as part of the post-Enron reforms enacted by Congress, led “to a whirlpool of lower and lower marks,” Zell said. “Without mark-to-market fair value accounting, this crisis would never have reached this level. You took a big problem and made it into a gargantuan problem.”

Zell predicts that the U.S. will sink further into recession by early next year, but he suggests it will be a shallow downturn. “It's not likely to be as catastrophic as people think,” he said. He expects residential construction to pick up again as the apartment sector is strained by demand. Equity Residential, the Chicago-based apartment REIT he controls, is experiencing 95% occupancy rates currently. “We could probably run at 97%,” he said. “But there are 1 million new households being created each year in this country. I don't know where these people will live.”

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