While I found the Goldman hearings to be a travesty, and a rerunof the Army McCarthy hearings of 1954, the underlying issue is theStreet tried to make real estate into a commodity that can betraded and hedged like a commodity. Instead of trying to understandany of what was really happening, Levin and McCaskill and the otherclearly uninformed senators simply wanted to have political theaterand denigrate Goldman.

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Real estate is not a commodity. It is an asset which does nottrade or physically move. It's value does not shift hourly. Thereis not a liquid constant world market for a building or for amortgage. It is not oil, scrap, or corn. Therein lies the realunderlying problem. Each building is unique. It is different bymany measures form the one even next door. Commodities are exactlythe same. Oil is oil. Gold is gold. There may be differences bytype of oil, but Brent North Sea is essentially all the same. Justbecause a building has a mortgage on it does not make that mortgagethe same as other mortgages.

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When we created the initial hotel mortgage CMBS programs in1993, we were very clear in our underwriting that a Ramada was nota Ritz Carlton. A 25 year old exterior corridor hotel is not a newCourtyard. A hotel is not just a hotel and it is clearly not aretail center, nor a package of home mortgages.

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When you mix subprime residential with B pieces on hotelmortgages, with derivatives of indexes and whatever, all you haveis a pile of stuff. The real underlying values cannot ever bediscerned. It is just a package of disparate paper. Then you usemore indexes and then derivatives of the indexes and you get asecurity that has no value and no meaning other than an imaginaryvalue that has no underlying basis. It is simply a directional betas was the case in Abacus. There residential real estate wassupposedly converted to securities to be used to take one or theother side of market directional bets. There was nothing illegalabout any of what Goldman did, it was just stupid. The Street wascreating more and more esoteric paper that had nothing at all to dowith the underlying assets. In fact, at some point in this therewere not really any underlying assets. Just pieces of paper.

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If we are to fix the problem we need to make the cleardistinction between real estate assets being unique hard assetswith very individual characteristics, and securities orcommodities, which real estate is not. As one of the securitizationpioneers, at least in the hotel space, I think I understandsecuritization fairly well. There was very good reason to create itfor residential in the eighties so that there was a capital marketto fund residential growth when the S&L's collapsed, which theydid by being allowed to make commercial loans. When the concept ofsecuritization was brought to commercial real estate it opened thedoor to inevitable abuse. It created massive amounts of capitallooking for a place to go and that led to the over lending. Thatgot compounded by the inevitable use of derivatives, and the lossof any connection between the real asset and the security.

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If we are to avoid the next crash, then we need to go back totying real estate mortgages directly to the underlying hardasset and valuing the paper by properly underwriting the asset. Ifyou cannot walk over to the asset and touch it then you have no wayto properly value it. Securitization has a place, but we need clearand well considered rules to avoid the runaway insanity we justlived through where children with high powered math degrees, and nounderstanding of real estate, are allowed to create securities thathad no connection to any assets and were simply complex tradingvehicles with no reason to have been created in the firstplace.

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Joel Ross

Joel Ross began his career in Wall St as an investment banker in 1965, handling corporate advisory matters for a variety of clients. During the seventies he was CEO of North American operations for a UK based conglomerate, and sat on the parent company board. In 1981, he began his own firm handling leveraged buyouts, investment banking and real estate financing. In 1984 Ross began providing investment banking services and arranging financing for real estate transactions with his own firm, Ross Properties, Inc. In 1993 Ross and a partner, Lexington Mortgage, created the first Wall St hotel CMBS program in conjunction with Nomura. They went on to develop a similar CMBS program for another major Wall St investment bank and for five leading hotel companies. Lexington, in partnership with Mr. Ross established a hotel mortgage bank table funded by an investment bank, and making all CMBS hotel loans on their behalf. In 1999 he formed Citadel Realty Advisors as a successor to Ross Properties Corp., focusing on real estate investment banking in the US, UK and Paris. He has closed over $3.0 billion of financings for office, hotel, retail, land and multifamily projects. Ross is also a founder of Market Street Investors, a brownfield land development company, and has been involved in the acquisition of notes on defaulted loans and various REO assets in conjunction with several major investors. Ross was an adjunct professor in the graduate program at the NYU Hotel School. He is a member of Urban Land Institute and was a member of the leadership of his ULI council. In 1999, he conceived and co-authored with PricewaterhouseCoopers, the Hotel Mortgage Performance Report, a major study of hotel mortgage default rates.