Eliot Spitzer Discusses the Election, Economic Policy, Tax Reform and What it Means for Real Estate

Eliot Spitzer Discusses the Election, Economic Policy, Tax Reform and What it Means for Real Estate

Eliot Spitzer has had several acts to his career, which has not been without its share of controversy.

Lawyer. Prosecutor. Attorney general. Governor. Political commentator. And, now, real estate investor. Along the way he’s had his highs—prosecuting the Gambino crime family when working in the New York County District Attorney’s office and cracking down on financial excesses as attorney general. And lows—resigning as New York Governor just over a year into his term. Through it all he’s retained a thirst for surveying the political and economic scene and speaking out where he sees rights and wrongs. He has emerged as a sharp-tongued commentator on politics and economics, first for CNN and now for Current TV. He also writes a blog for online magazine Slate.

After stepping down as governor, Spitzer joined the family business Spitzer Enterprises. He is the son of Bernard Spitzer—a long-time New York real estate mogul, who, as of 2008, had built an estimated net worth of $500 million.

During his career Bernard Spitzer developed a slew of high-profile luxury apartment buildings in Manhattan, along with a handful of commercial buildings.

Eliot Spitzer now works in the Crown Building on Fifth Avenue—a property Spitzer Enterprises owns—with an office that overlooks Central Park.

Since he joined the firm, Spitzer Enterprises has made at least two high-profile commercial real estate acquisitions in the Washington, D.C., market. In 2009, it acquired 1615 L Street for $180 million. And in 2011 it bought 4800 Hampden Lane in Bethesda, Md., for $90.3 million.

The firm is looking to take advantage of distress. For 1615 L Street, a 412,000-sq.-ft. property, the firm paid $42 million in cash and assumed a $138 million mortgage. The overall price was about $30 million less than the property had traded for in 2006.

Spitzer remains deeply passionate about politics and about the direction of the financial sector. With a background in public service and a burgeoning career as a property investor, Spitzer is uniquely situated to comment on the political and financial scenes.

In a wide-ranging interview with NREI, Spitzer shared his thoughts about the upcoming presidential election, the state of Wall Street and his approach to real estate investment.

Spitzer remains a partisan Democrat and sharp critic of Republican policies. (For alternative thoughts on the upcoming election, check out our roundup of quotes from 16 industry pros.)

NREI: How does the political scene affect commercial real estate? We’re sitting here shortly after the national conventions. What are your reactions to them?

Spitzer: I wear my politics on my sleeve. I don’t wear them as a partisan. I was a Democrat while I was in office. I’m still a Democrat and part of that party. But it’s not because I’m a Democrat as a partisan. It’s because I happen to believe the principals articulated by the Democratic Party have made more economic sense.

Those two conventions really articulated two different economic worldviews. I would be worried if we were to return to what I hear the Republican Party propounding as its desired course, which is [taking] fiscal and regulatory approaches that did not generate meaningful growth during the periods that they were implemented as opposed to a more reasoned and balanced approach that President Obama has implemented. This approach would have been viewed many years back as an entirely bipartisan/centrist approach of fiscal stimulus, tax reform that is designed to keep government spending at a historically appropriate level, fund appropriate infrastructure, defense, education and entitlement programs while simultaneously reining in what needs to be reined in, which is the trajectory of long-term health costs. That’s what Obama is talking about in trying to thread the needle in a tough political and economic environment.

This isn’t high-level economics. It’s simple arithmetic. The arithmetic of the Republican approach doesn’t work. That’s been proven for the last four years. How does that affect commercial real estate or residential real estate?

If you don’t have long-term balanced growth, real estate is going to suffer. We went through the boom and bust of the residential crisis, the mortgage crisis. It was a consequence of the policies primarily of the Republican deregulatory worldview that permitted the bubble to be inflated. There are lots of villains. I’m not trying to put that in a partisan light. It’s a more nuanced story. But if there is one worldview that led to the crisis, it was a deregulatory, laissez-faire perspective about debt and financing that had cataclysmic consequences. That’s what the other side wants to go back to.

I had a fascinating interview with Richard Posner. He was the leading light, the father of the economic worldview that led us down that deregulatory path. And he said, “Hey, guys, that didn’t work.” He’s an incredibly smart guy who was willing to look at the evidence and said, “You know what? We need to appreciate when deregulation fails. And he’s also an avowed Keynesian. He makes no bones about that.”

I’m looking forward to the debates because if they’re done properly they will lead to an intellectual engagement that we haven’t yet seen. When it comes to Romney I’d like to ask if him if he’d taken the oath of office in January 2009, with the economy in free fall as it was, what would he have proposed to do? I’m hard-pressed to believe he wouldn’t have proposed a stimulus of some sort—an old-fashioned Keynesian stimulus. It did work. And for all his harrumphing that the stimulus was cronyism—they like to use Solyndra as the exclusive example of what the stimulus was about—I’d like to have him be forced to admit he would have proposed a stimulus and here’s how he would have done it. And if he merely says he would have cut taxes, the answer is that one-third of the stimulus was a tax cut. Frankly, the part the economists think was the most effective was direct government spending. That’s where you get the most immediate return. That’s why on a macro level I think we’ll be better off if the president wins and he’s able to put in place larger economic policies that he’s been pushing for.

NREI: For the past couple of years business leaders have talked a lot about uncertainty as holding back activity and that includes uncertainty stemming from Washington and not knowing what may happen with taxation and regulation. Do you think that argument holds water?

Spitzer: Can I tell you something? This whole argument about uncertainty is one of the greatest canards that’s propagated out there. Uncertainty about what? There is always uncertainty about what’s going to happen. Congress can always change tax rates. It could repeal the capital gains differential tomorrow. Ronald Reagan did that.

It’s an excuse by people who want to blame somebody. There is uncertainty out there. Smart business folks love uncertainty. It creates opportunity. It creates diverging views about value, which creates the chance to buy and sell and make money. The uncertainty that people don’t like is the uncertainty caused by the cataclysm that was caused by the Bush policies. That’s the uncertainty we’re dealing with.

The uncertainty of major investment banks going bust because they had lost all sense of risk management and were playing with other people’s money—that’s the uncertainty that was damaging. It’s not regulatory uncertainty. If you commit fraud, you know you’re committing fraud and you should be sanctioned. There is uncertainty that you may get caught. But that’s not the type of uncertainty I’m going to sympathize with people for worrying about.

Smart writers have peered through this and said, “Guys, get over it. You’re just looking for somebody to blame.”

We don’t know what they’re going to do about the fiscal cliff? Yes, we don’t know. That’s because the Republicans are refusing to negotiate. We don’t know what’s going to happen with raising the debt ceiling because Paul Ryan didn’t want to move on that. We don’t know what’s going to happen because when Bowles/Simpson was there, Paul Ryan said no.

So if there’s uncertainty at a governmental level it’s not because the president has hesitated to articulate what he wants to do. It’s because the Republicans have failed over and over and over again to do anything other than block.

So I’m not at all sympathetic to, “Gee, blame the president for uncertainty.” It’s a canard. And frankly, I’m using a polite word for it.

NREI: In terms of taxation, the subject of carried interest and how that’s treated has come up again and again in recent years. It’s typically talked about in reference to private equity and hedge funds. But it also would have massive implications for real estate partnerships. Do you see this moving forward?

Spitzer: There is absolutely no economic rationale for dealing with carried interest as a capital gain. None whatsoever. It shouldn’t be done. I’m in favor of getting rid of the capital gains differential altogether. I don’t see any argument any longer, having looked at a lot of the economics and spoken to a lot of people.

Reagan did this. During President Reagan’s era we eliminated the capital gains differential. Dealing with earned income and capital gains the same way is what we should do as a matter of policy and as a matter of equity. It’s what I think we stand for as a nation. Would it have a negative impact on me? Sure. Nobody doubts that. Do I benefit from the differential? Sure. But I would vote to repeal it.

NREI: Do you think it’s possible?

Spitzer: I think it’s unlikely because of the raw politics.

I think there’s an 80 percent likelihood that President Obama is elected. The last important number that will come out will be the September job numbers that come out in October. The October numbers that come out four days before the election will probably be too late to have a great impact. And then the three debates. Those are the moments when trajectory can shift, barring unforeseen stuff.

But I don’t think the Democrats will take the House. And the Senate will end up in a rough equilibrium. Nobody can predict Virginia. Nobody can predict Massachusetts. Even Missouri. So you don’t know if it will be 51 to 49 one way or the other. It will be close either way.

So how do you then see some sort of negotiation going forward? Probably they punt for a year and extend tax cuts for everybody. I don’t see any way they move on capital gains, which would be too big a shock to the system when people will be looking for an easy way out. And then some sort of agreement will be reached on long-term entitlements in a year or so.

So on the capital gains piece, I would be very surprised if it altered in a fundamental way. The carried interest piece, maybe, depending on who has a stronger hand.

NREI: We’re sitting here a couple years after Dodd-Frank has passed and there are still many regulations that have yet to be written, including for securitization. Do you have thoughts on how that may turn out?

Spitzer: It’s too early to know.

One of the things I’ve never understood is objections to statutes because they are long. It’s long and complicated because the world is big and complicated. You close a mortgage these days and the document is 10 times thicker than it used to be. That’s the unfortunate reality of the world.

Glass-Steagall was 32 pages. Dodd-Frank is more than 2,000. We’re dealing with a complex world. We’re dealing with simple principles that are difficult to define.

Dodd-Frank was a good effort to forge some sensible compromises. It didn’t go far enough. When you’ve now got Sandy Weill acknowledging that the megabank concept was wrong, those of us who opposed it from the beginning can say, “History hasn’t supported your theory.”

Putting that aside, Dodd-Frank was crafted and passed before what is now approaching a consensus that the big megabank theory should be dispensed with. But what Dodd-Frank did, through the Volcker Rule, which was the single most important piece of it, was to carve out some of the riskiest behavior and to create some sort of safety net under the “too big to fail” institutions.

How will it affect securitization? We just don’t know yet. I can tell you from people that are on my side of this, securitized debt is a pain. It’s awful. You try to do the simplest thing and you’re dealing with servicers whose interests are ambiguous. You’re dealing with complexity. Refinancing is tough. I’ve at various times sworn never again to get into a deal that involves securitized debt. It’s just too complicated and I want to have one party on the other side that I know I can deal with.

People are still working through the consequences of what happened years back. Smart people are still leery of crazy values and crazy multiples and leverage ratios and people are going back to a simpler form and deal structure. And that makes sense.

NREI: Some people argue that commercial real estate is a trailing industry that is ultimately dependent on jobs. What do you think of what President Obama and Governor Romney have put forward in terms of stimulating employment?

Spitzer: I feel more comfortable with President Obama’s long-term macro approach to where we are. I think his budget will build a more stable economy long term than Mitt Romney’s budget.

But we also don’t know what Mitt Romney will be once he wins. He is a chameleon. If we get the Romney who was the governor of Massachusetts and who was the somewhat mainstream liberal thinker and economist that supported healthcare reform and the individual mandate, that’s one thing. And he’d be very much like Barack Obama.

If we get the Mitt Romney who’s in enthralled with Paul Ryan because he needs to excite a base and he’s held hostage figuratively by the Tea Party, that’s a different Mitt Romney. If Romney wins and we have a Republican majority in the Senate and Mitch McConnell would be majority leader held in control by the Tea Party, that’s not something I can look forward to.

Major urban centers would suddenly find their budgets out of whack because their Medicaid would be sharply cut. Infrastructure spending would go down dramatically. If you think about the long-term vitality of cities, we need the subways. Chris Christie canceled a tunnel project to get good headlines, not recognizing that what he was doing was hurting the central business district in New York and Northern New Jersey. So those are the sorts of things that will hurt long term. It would be as if 200 years ago somebody had said, “I don’t want to build the Erie Canal.” That’s the metaphor. People who aren’t building infrastructure aren’t building central business districts that are vital.

I’ve never known if commercial real estate is a lagging or leading indicator. It’s more jagged than residential. The residential side has more gradual ups and downs. That’s the nature of big buildings with major tenants. It’s also just been the nature of commercial real estate that you get overbuilding in central business districts and then everybody lurches to a halt in terms of big expansions. So you have big empty, hulking structures, whereas people still need a place to live. Even if the economy is not good, rents will go up more gradually on the residential side. So it’s a less jagged market on the residential side. I think the larger issue for the commercial market is that some cities are going to continue to thrive and some are going to suffer. Which ones thrive and which cities become centers of intellectual creativity is the hardest question people should be thinking about.

The reason for that is some cities, like New York, will draw kids and creativity. … The reason New York thrives is every immigrant in the world wants to be here and every college kid in America wants to be here.

Is Austin, Texas, that? Maybe. People look at Austin and say it’s doing stupendously. San Francisco has that. Chicago has that. Boston. There are other cities that people would say, “Eh. There’s no compelling reason for that city to survive.” That’s more a question of what cities will become global cities and which won’t.

NREI: How have the banks have been dealt with since the financial crisis?

Spitzer: There is a general sense in the public at large that “bad stuff happened.” We don’t know individually or institutionally who did it. But this was more than just a collective error of judgment. There was a sequence of misrepresentations of known falsehoods propagated to the public about value and securities that were sold and market mistakes. And people should be held accountable.

I think that is basically correct. There should and must be an accountability. There’s not yet.

There was also a complete buy-in to a wrong understanding of the market. There is a defense made that everyone drank the same Kool-Aid, from Alan Greenspan to Ben Bernanke to Bob Rubin to Larry Summers. And everybody bought it and everybody acted on a set of presumptions on what credit default swaps were worth. And so none of this was fraud or criminal. It was just an intellectual era.

Many people bought into a worldview about deregulation and the way the world would operate that turned out to be wrong. But there also was a fair degree of fraud that has not yet been prosecuted, and I think that frustration remains. We’re probably passing the point where cases could be brought because of statutes of limitations.

But I think the public is also frustrated by a lack of both remorse and acknowledgement of wrongdoing by the senior leadership of the banking industry. When you have senior people in the banking industry continuing to maintain that nothing improper happened, that just rubs people the wrong way. The banks have been the beneficiaries of so much tax support.

They say TARP has been repaid, that’s not the point. The support they’ve gotten has come in so many shapes and forms to this day. With interest rates so low, savers are giving nothing to subsidize the balance sheets of banks. You can argue that this needs to be done. But nonetheless the banking sector has received an enormous bailout. And yet there’s not a single moment where the leaders of the industry have collectively stood up and said, “We acknowledge something was wrong here. We need to restructure this industry and go back to our fundamental root purpose.”

Banking should be simple. When banking is complicated, bad stuff happens. When the intermediary is making too much money based on the notion of complexity, somebody at the end of the day is going to suffer.

NREI: Where do you think the LIBOR scandal is headed?

Spitzer: I don’t know how much money will be recovered at the end of the day. It will be hard to prove damages. I see some local government officials now saying they have a budget deficit that they will balance out of the LIBOR settlements. I don’t think that will happen.

You’re talking huge sums of money because we all know a couple basis points on an $800 trillion basis becomes a big number. On the other hand, for individual municipalities, I think probably proving huge damages is going to be difficult. I think it’s a case that is more instructive on how the problematic behavior reached into so many different parts of the financial services sector.

There are at least two different strands to the LIBOR scandal.

One that is less invidious is where the banks, during the crisis, were told with a wink and a nod, “Don’t overstate your borrowing costs because we don’t want to signal to the market that you’re weak.” That was one piece of the Barclays storyline. Whether they misunderstood the wink and the nod, that’s one piece of it.

The more brazen piece of it is people on the trading floor calling up to the LIBOR rates center and saying, “We have position X. It would help us if you moved LIBOR this way.” That’s outright criminal conduct. How long that was going on, how far that reaches, who knows?

NREI: Any last thoughts?

Spitzer: From a real estate perspective, I think the hardest decision is figuring out which cities will thrive and which will not. You drive through some cities and some downtowns and you say, “There’s a problem here.” You walk around New York City—any part of it—and you see this place is bursting with energy, even parts of the city that used to not be.

My dad grew up on Avenue B and Fifth Street, which back then was the Jewish ghetto. Then in the 70s it was the center of crack distribution. And now you can’t afford to rent an apartment there! It is amazing. Part of it is that the life of cities is just incredible in terms of how they emerge again from bad moments. But in New York, Brooklyn is now a cool place to live. My kids don’t go to parties in Manhattan anymore. They have to go to Brooklyn. And some people are saying Queens is next. This place is just bursting at the seams and there are some cities that are not. And figuring out which ones will and which ones won’t is really the issue.

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