Joel Chernoff: Ben, clearly BlackRock was early in picking this out, but should investors as a group have realized that the real estate bubble was going to burst? And if so, what could they have done differently to manage their risk?
Bennett Golub: Well, sort of by construction, when you call something a bubble, then its bursting is, you know, a given. So I think that the really important question is not whether the bubble is going to burst, but rather when. That's, of course, the hard one. Because, in fact, you can make lots of money riding bubbles, you just need to know when to get out of them.
It was you knew something had to do it, and we kept on thinking, what was the catalyst going to be. So I'm not sure that there was a particularly obvious way to predict the time of the bubble bursting, but that it had to burst I think was pretty straight forward.
Mr. Chernoff: Leslie, was there a good way to reduce one's risk that investors didn't do?
Leslie Rahl: Well, I'm not sure if it's a matter of reducing risk or at least understanding the risk that you were taking. What troubles me is I don't know how to make money without taking risk, so risk unto itself isn't bad.
I think there were a lot of people, though, who thought they were taking low risk who, in reality, were taking high risk, and that's a real failure of the system.
Now part of it, I think there is no such thing as a free lunch, and if someone is getting an extra yield, there's a reason. I also think that asking questions about why is this a better investment, although it is highly complex, highly structured and very, you know, very highly leveraged, people and I have many clients who, unfortunately, when you try to explain it they don't necessarily, in the good times, want to hear what the issues are.
So ... they might have done things differently, they might not have done things differently. But I think there was a lack of awareness of the amount of risk that people were taking that is quite concerning.
Peter Bernstein: When you look around the world and see how much of the rest of the world was engaged in this, it is amazing.
Harrison Hong: It's hard, because I think as we're beginning to see, a lot of smart people basically, people who have had terrific track records have gotten killed in these most recent times. So it's a little hard I think with hindsight to say ... that it was so obvious.
But I do think that one of the lessons you draw from the history of these crises is that housing bubbles are particularly nasty. I think if you look at most of the real serious stuff that had major contagion into lots of the real (estate) sector, it's typically been always about housing.
I think, in particular, the Fed really kind of made a mistake of not calling or at least recognizing that if it was something having to do with housing, we should be a little careful, because I think they drew the wrong lesson from let's say the tech bubble. We came out of the tech bubble, things were kind of fine, right, and in some ways you would have thought the technology was pretty great coming out of the tech bubble. It's not even clear it was a bad thing. But now at housing I think, if you look at the history, at least the Fed should have been more aware of the systematic risk associated with housing.
Mr. Chernoff: And investors, should they have done anything differently?
Mr. Hong: I think it's hard to put that onus on regular investors when you have pretty sophisticated investors who couldn't see through all this stuff. Again, this is the case where I really doubt if anybody could have seen just how much how destructive this has been. I think you're beginning to see how interconnected markets are, the importance of leverage. I don't think that was so obviously forecastable upfront.
Cliff Asness: It's not just knowing you're in a bubble, it's what do you do about that as an active investor, someone who's trying to add value. You have to try to think about when that's going to burst. But that's art, not science. Let's not kid ourselves.
Mr. Bernstein: The most important thing I learned writing Against the Gods is Pascal's Wager. What are the consequences if I'm wrong? I have two choices. If I do this and I'm wrong, what are the consequences? The people who were taking out subprime mortgages could not be wrong. Housing prices had to keep going up. So, OK, they were going up. But by 2005, they had just about quadrupled. So that's a moment, I think, where you can say what happens if I'm wrong and housing prices shift and begin to go down from this point? I mean, I'm ruined. I'm ruined.
So that question wasn't asked. People couldn't conceive of the possibility they might be wrong. And you can be wrong any minute. We can be wrong one minute from now. You have to keep asking that question.
Mr. Asness: I think you're dead right, but the world where the person taking out the subprime mortgage asked that question and gets it right ... I'm cynical we'll ever get to that world. Even though you're dead right, that question should have been asked.