I've spent part of the day reading about super senior tranches and synthetic bonds and all the rest, and on some level, I think we're making this too complicated. The other day, Robert Rubin was asked if he's made mistakes. "I honestly don't know," he said. "In hindsight, there are a lot of things we'd do differently. But in the context of the facts as I knew them and my role, I'm inclined to think probably not." As far as I understand the situation, at the heart of all this was a fairly simple dynamic. The subprime market -- which is to say, the market of loans sold to high-risk individuals -- exploded. The banks invested in those loans. Other people bet on their safety. And the loans collapsed. The mistakes, in retrospect, seem quite simple, and quite stupid. That's not to say that the instruments involved weren't very complicated, but the complicated nature of the instruments seems to have been a key player in obscuring the fundamentally hollow nature of the loans. It keeps coming back to the subprime loans. To the fundamentals of the housing market. In 2003, John Talbott wrote a book called The Coming Housing Crash. Talbott was a former Goldman Sachs banker, which is to say, he worked for Rubin. He was seeing something. He wrote the book "after hearing that a friend—a teacher in San Diego who earned $45,000 a year—had just refinanced his condominium and borrowed $255,000 against its rising value." These loans weren't secret. In 2004, Dean Baker sold his house. "Houses have something similar to a stock's price-to-earnings ratio: their rental value. In a sane housing market, Baker says, a home's annual rent is roughly one-14th of the home's value...The annual rent he pays on his condo is roughly one-17th of its value -- and that's not taking into account high property taxes. Add those to the equation, plus condo association fees, and the ratio is closer to one-20th." Baker didn't have insider knowledge. He just had a contrarian personality and an abiding faith in the fundamentals. Rubin did not. Somewhere in the gap between the two of them lies Rubin's mistake. This stuff is complicated. But this effort to suggest that no one could have been more prescient is really weird.
