Milken grim on real estate

The L.A. billionaire says in an interview with Bloomberg that it will be "quite a while before we have a robust housing market again,” noting that "the idea that any loan against real estate is a good loan has never been a rational thought.” It was more than a decade ago when Milken, the junk bond king turned philanthropist, began talking up real estate as an investment (remember it had fallen out of favor when folks lost their shirts in the early 90s). What's especially interesting - and generally forgotten - is how Milken envisioned that real estate could become as tradable as stocks, presaging the boom in real estate-backed securities. Here's what he told Fortune in 1996:

"How about if Fidelity tomorrow had 200 funds" - each of which concentrated on some slice of the world's real estate market, Milken muses. "If they got to critical size, say, $50 billion to $100 billion, you'd have created real liquidity in the real estate market." But how would you place a value on these securities? he was asked. "The marketplace will value them," he replied. "If you were a fund company, you'd need an entire research effort, which would say that these are the pieces that make up this security and they are worth this amount. And then some other company might have a different assessment, but that's what makes a market."

[CUT]

And how big is this potential marketplace? Huge, in Milken's opinion. "The debt market today is between $400 billion and $500 billion in the public market and another $400 billion to $500 billion in the private markets," he says. "So that's $1 trillion. Real estate in the U.S. alone is between $6 trillion and $8 trillion." Ultimately, he believes, a securitized real estate market could be every bit as big as the entire debt market is today. "The need," he concludes, "is there. And whoever addresses this issue will wind up creating a whole new industry. It will be just like the enormous growth of the mutual fund industry."

As it turned out, the marketplace did a pretty crummy job at valuation, which is one reason we're in such hot water. Oh well. Milken expects the economy to withstand the current slide in housing. "Today the strength of the world's economy is helping America and the United States, and I think that will soften the blow of our downturn in housing,” he told Bloomberg. "We have to realize, similar to the time of Galileo, that the whole world is not necessarily revolving around the United States and the amazing story of America.” In case you forgot, Milken received a 10-year prison sentence in 1990 and paid $1.1 billion in criminal and civil fines after pleading guilty to securities violations.