Finance authority reviews sub- prime crisis
By John Temple Ligon Temple@TheColumbiaStar.com

Alex Sherling and Peter Linneman

Dr. Peter Linneman, the Albert Sussman Professor of Real Estate, Finance, and Public Policy at the Wharton School of Business, the University of Pennsylvania, visited Columbia Friday, December 7. He was the year's last of the Wachovia Executive Lecture Series at the Moore School of Business.

His book, Real Estate Finance and Investments: Risks and Opportunities, has been adopted as the standard text at Yale, Johns Hopkins, USC, Brown, Columbia, and Wharton, among others.

Linneman is a founding principal of Linneman

Associates. Realtor

Magazine recently named Linneman one of the 25 most influential people in real estate.

Dean Hildy Teegen welcomed the standingroom- only crowd in the Lumpkin Auditorium. Darla Moore introduced Linneman as the man who tried to talk her into buying Rockefeller Center at a time when Manhattan office space was 19 percent empty. Linneman was chairman of the board of Rockefeller Center Properties.

Darla Moore

Linneman took the floor for 90 minutes. He began by rhetorically asking the crowd how the current economic condition came about. He answered with the dynamic position of being torn between greed and fear. The world was in the same shape, he said, during the late '80s S&L crisis and the 1998 Russian ruble mess.

As prices go up and credit spreads go down - considering the last 20 years - fear has won. On one day in the fall of 1987, Linneman lamented, he came home 23 percent poorer than he was that morning.

The attacks on September 11, 2001, triggered a greater reaction than the responses to the Russian ruble mess or the sub- prime crisis. Actually, it was a two- way reaction. The Fed loosened the reins on money and the dot.com downward spiral stopped.

Another explanation of how the current eco- nomic condition came about was the phenomenon where there was more money than brains. Some people have no brains, and what little money they might make is the greater total. But those who do have brains get more money than they can use.

Joel Smith and Manuel Gaetan

For the years 2002- 2006, the whole world experienced economic growth unlike any in its past. As the world created income and wealth at a rate beyond anything in its past, the world's infrastructure failed to keep up. The rating agencies, for instance, misled everybody as they struggled to catch up.

Darla Moore, Linneman had to note, always did her own due diligence, never depending on the rating agencies, and her personal net worth showed as much.

The sub- prime crisis came about due to false income declarations and faulty credit checks. There was idiocy on behalf of the borrowers, and there was idiocy on behalf of the lenders. And, as Linneman reminded the audience, idiots always end up losing.

To read the current economy, Linneman liked to check on airports, hotels, and restaurants. If those three are doing well, the economy must be managing pretty well.

Linneman quoted from a Milton Friedman lecture he heard in 1973: "Do not confuse losses among participants with losses to society." To illustrate the point, Linneman asked the audience to imagine a poker game. When a player loses, the table still has the money.