The Great Recession of 2008 left its mark on many aspects of our society, from real estate investment to job numbers. Though it’s been almost a decade, we’re still struggling with its legacy, from sluggish economic growth to an employment rate that is finally beginning to match pre-recession levels.

It’s hard to understate the lasting, profound impacts of the Great Recession. Yet as painful as this time was for so many, I did learn some critical lessons, particularly where it concerned investing. In fact, the Great Recession later proved to be an opportunity for me, as it was one factor that led to my departing Morgan Stanley and striking out on my own to form GreenOak Real Estate.

The Danger Of Financial Instruments

Several years ago, I had the opportunity to sit down with Todd Henderson of RREEF Real Estate and Steve Tomlinson of Kirkland & Ellis at a Privcap discussion. In retrospect, what struck me about our conversation was that the crisis didn’t come out of nowhere; in fact, there were a number of warning signs that are much, much clearer with hindsight.

In spring 2007, I attended a dinner hosted by Bob Rubin, a consummate finance professional and a good friend of mine. What most alarmed me about the meeting was the various (and complex) financial instruments that we spent most of our time speaking about: these included the structured investment vehicle (SIV) and its closely related cousin, the special purpose entity (SPE).

In essence, a SPE was a shell corporation: Though they were supposedly independent from a larger company, SPEs were actually controlled by executives, and served as a way to offload liabilities (and losses) onto another entity. SIVs were similar: They were pools of investment assets, borrowing money from investors (short-term) and investing on long-term things like subprime mortgages. They earned money on the spread between short-term debt and long-term investments.

Needless to say, being an equity investor, I was shocked and concerned about the recklessness (and inherent complexity) of these instruments. I spoke to my team about this sort of financial engineering, and though we were worried, we still thought that perhaps the damage would not touch real estate equity. After all, we were (and still…