by Gary S. Meyers and L. Steven Platt

It is nothing short of amazing how our government repeats past errors…and calls it change. Consider this history:

June 1973. While sitting with Max Eisenstein, an owner of Terminal Construction (aptly named), one of this column’s authors asked, “What market research and product planning did you do before starting to build your 350 unit condo tower in Verona, NJ?”

“Well, none really, because we know the market here and we have an identical rental property next to the site. Besides, if it wasn’t a good deal, our lender XYZ Big Bank (NY) wouldn’t have funded. They are professionals and know what they are doing,” came the reply from Mr. Eisenstein.

July 1973. While sitting with the Senior V.P. at XYZ Big Bank (NY), who funded the Terminal loan, one of this column’s authors asked, “What market research and product planning did you do before you funded the 350 unit condo tower in Verona, NJ?”

“Well,” said the Senior V.P., “none really, because Terminal Construction knows their market. Besides, if it wasn’t a good deal, they wouldn’t be doing it. They are professionals and know what they are doing.”

Result: The project failed and tens of millions of dollars were lost. And for those skeptics, these conversations really did take place and are accurate.

June 2007. While sitting with Tony P., an owner of P. Construction, a major homebuilder and land developer in several regions of the country, our  author asked, “What market research and product planning did you do before starting most of your projects?”

“Well, we know the markets because we have been successful there before. Besides, if these projects weren’t good deals, PDQ Big Bank (Chicago) wouldn’t have funded. They are professionals and know what they are doing.”

July 2007. While sitting with several of the senior executives of PDQ Big Bank (Chicago), who funded hundreds of millions of dollars to P. Construction, the same author asked, “What market research and product planning did you do before you funded all this money?”

“Well, none really, because P. Construction knows their markets. Besides, if these weren’t good deals, P. Construction wouldn’t be doing them. They are professionals and know what they are doing. The company is so strong that when they ask for cash, we ask where do you want the money sent. And all of our loans to them are non-recourse.”

Results: In both cited cases the borrowers and the banks failed during the real estate and banking melt-downs of the 1980s and 2000s—and the government reacted the same way.

Both times the government wrote checks, using taxpayer money and made the cash available to cover losses. Then to fix the problems, the government put the same people in charge who caused the problems in the first place when they made the bad loans.

In the 1980s the government forced healthy S&Ls to absorb sick institutions, allowing the “good will” associated with the sick S&Ls to be used as capital. Then the government changed the rules and made the healthy S&Ls sick, which resulted in their failure.

Today, the government is rewarding the bungling banking giants with bailouts, cash and favorable contracts. The healthier, smaller local and regional banks are being hit with all sorts of restrictions, from limiting the interest rates they can pay on CDs, to requiring increased reserves for performing loans that “might” be a problem later, to increasing deposit insurance premiums for problems that have not yet occurred. All of this reduces the capital these banks have and now it prevents them from lending—assuming that they are not now failing.

Throughout all of this, absolutely nothing has been done to understand the fundamental problem of how to properly evaluate real estate. The net result is that banks are not lending for fear of making mistakes.

Is this history repeating itself or change?