declared thatthis thinking had been a mistake.

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To be sure, there were many critics of TARP within the CREindustry; the criticism focused on the mechanics of how the assetswould be valued and purchased as well as concerns that the fundswaiting on the sidelines to pick up distressed paper and assetswould be priced out of the market by taxpayer funds.

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Still, though, to have the program snatched away suddenly is ablow -- – both in the expectations that funding would improve as aresult of the buy-back program, as well as a vague confidence thatTreasury really knew what it was doing.

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"By my reckoning, this is now the fourth prime objective statedsince the first Paulson proposal 45 days ago," Brian Olasov,managing director at McKenna Long & Aldridge LLP in Atlanta,tells GlobeSt.com."First, Paulson called for purchasing troubledassets. The second was a call to stabilize regulated financialinstitutions through direct capitalization. The third, particularlyespoused by the FDIC, focused on mitigating foreclosures. Whilethere's nothing inherently wrong with any of these initiatives, itlooks a bit like cabinet-level ADD."

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Also it is not a foregone conclusion that the banking sector –as Paulson maintained – has stabilized. "There seems to be ageneral sense of disappointment with the change of plans becausebank stocks are once again falling," Frederic Ruffy, the senioroptions strategist at WhatsTrading.com, a New York City-basedprovider of options market analysis, tells GlobeSt.com. The Dowshed 411 points on Wednesday, largely in response to the news.Furthermore "the PHLX Bank Sector Index (BKX), which tracks theperformance of 24 companies in the industry, is down 2.97 to 48.23and falling below the closing lows from both October 9 and July15." Judging by the action in the share prices, he says, "investorsseem to feel a sense of disappointment and anxiety about theoutlook for banks, perhaps even more than in mid-July andmid-October."

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The Street's discontent, though, does not change the situation.Twenty-four plus hours ago the government was going to clear toxicdebt off of banks' balance sheets. Now it won't. The question is,how will this policy about-face impact commercial real estatelending, which has all but dried up now?

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The consensus, not surprisingly, is that it will result in aneven further tightening of lending to real estate projects."Treasury's decision to shift the focus of TARP funding away frompurchasing illiquid mortgage assets from bank balance sheets islikely to prolong the credit thawing process for real estatefinance," James I. Clark, managing principle of EnTrust RealtyAdvisors, an affiliate of the Alter Group in Lombard, Ill., tellsGlobeSt.com. "There will be little incentive to increase realestate exposure through new loans until balance sheets arecleansed."

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While a similarly dismal credit environment existed before TARPwas ever formed, lenders are now going to have to shoulder theadditional burden of dashed expectations among shareholders,Kenneth Miller, an attorney with Moldo Davidson Fraioli Seror &Sestanovich LLP in Los Angeles, tells GlobeSt.com.

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"For example, upon learning about the denial of buyout money tocommercial lenders, shareholders may sell off their shares of stockin the lender, if the lender is a publicly traded company, even ifthe commercial lender may not need the bailout money in the firstplace. The denial of money to commercial lenders could alsonegatively affect their bond ratings, which in turn worsens thepublic perception, and which again may also lead to the sell-off ofshares of stock in the company."

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There are some bright spots to the situation, though. As ageneral holistic approach – as heretical as this view may be to theCRE industry – there is a grudging sense that using TARP to bolsterconsumer spending is a better plan. "With TARP government wasinterfering directly in the market by helping to set theprice,"William Gamble, author of "Freedom: America's CompetitiveAdvantage in the Global Market", tells GlobeSt.com. "There werealso too many conflicts of interests, economic incentives withoutsufficient legal disincentives -- Treasury was asking the peoplewho created these things to value them." Rather than trying to puta floor under the bad mortgages, Paulson is doing something muchbetter, he continues -- trying to speed up the work out process."Faster resolution of the mortgage issues provides informationabout lending risk to the market, which, over time, will increasethe amount of credit and help commercial real estate."

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Also at least one constituency in the commercial real estatemarket – opportunistic funds and investors -- is likely to benefitfrom the shift, Adam Weissburg, partner with Cox Castle &Nicholson in Los Angeles, tells GlobeSt.com.

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In its original incarnation the Emergency Economic StabilizationAct was to have created an instant market place for distressedassets, he says. One concern about this initial plan was that bankswould not be motivated to sell if the Treasury was a buyer. "Thethought was that investors would need to offer more than bottomdollar to encourage sellers to redirect sale efforts to the privatemarkets," he says. It is now clear that the Treasury believes it ismore important to stabilize the banks themselves through capitalinfusion. "This new direction means that those opportunisticinvestors now have less competition."

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Indeed, forcing buyers and sellers to finally come to terms onthe value of distressed assets and paper may well be the proverbialsilver lining of this whole debacle, Barbara Trachtenberg, apartner in DLA Piper's Real Estate practice in Boston andpresident-elect of Newire (New England Women in Real Estate), tellsGlobeSt.com.

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"My initial reaction to the news that the bailout will not beused to buy the illiquid assets is that it will be bad forcommercial real estate. If the assets aren't purchased, how elseare they going to get off the books? In addition, what is going tohappen in 1Q 2009 when the outstanding commercial real estate debtstarts to mature and the underlying properties are underwater?"

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The news, though, bad as it is, does creates some certainty in adismal market. "Now we know that the government is not going toprovide the needed stability for commercial real estate,"Trachtenberg says. "Perhaps that certainty will encourage thoseholding illiquid assets to sell them now, at whatever price themarket will bear, and get them off the books in 2008. Maybe thatcertainty will encourage lenders holding maturing commercial realestate loans to work with their borrowers or recognize the losses.We know that there is plenty of equity waiting in the wings forthings to start moving again, this could be the catalyst to get thecommercial real estate industry going so that equity can comein."

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Erika Morphy

Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.