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Barry Ritholtz's Masters in Business: Bethany McLean Interview · Masters in Business

0:03
Speaker 1: This is Masters in Business with Barry Ridholes on Bloomberg Radio.
0:08
Speaker 1: This week on the podcast, I sit down with a
0:10
Speaker 1: delightful and really incredibly knowledgeable journalist, Bethany McClain. You may
0:17
Speaker 1: not be familiar with the name unless you read bylines
0:20
Speaker 1: like I do. Bethany wrote one of the best selling
0:23
Speaker 1: books on finance. Um it was about Enron, The smartest
0:28
Speaker 1: guys in the Room, the spectacular rise and scandalous fall
0:33
Speaker 1: of Enron. And you may be familiar with her if
0:38
Speaker 1: you're a little older, maybe you were a traitor in
0:40
Speaker 1: the late nineties early two thousand's Bethany was. Her background
0:44
Speaker 1: is really fascinating. She graduates with a degree in both
0:46
Speaker 1: English and mathematics, ends up at Goldman sachs Uh as
0:51
Speaker 1: an m and a analyst, before she decides that's not
0:54
Speaker 1: what her future is going to be and she becomes
0:57
Speaker 1: a journalist. She's writing a fortune and in two thousand
1:01
Speaker 1: one publishes a article that at the time Enron was
1:07
Speaker 1: a skyrocket, a moon, a moonshot, really questions the valuation
1:14
Speaker 1: of Enron. She never alleges fraud. She points out how
1:17
Speaker 1: challenging it is to actually find out anything about about
1:22
Speaker 1: the company. Itself and really just raises a lot of
1:26
Speaker 1: questions as to how can this company that's essentially positioning
1:30
Speaker 1: itself as a utility be such a fast grower and
1:35
Speaker 1: yet not reveal much to the investing public. And and
1:38
Speaker 1: really that's where you start pulling the string on the
1:41
Speaker 1: sweater and eventually the entire Enron house of cards collapses. Uh.
1:46
Speaker 1: Obviously that's a hell of a way for a journalist
1:49
Speaker 1: to make a name for herself bring down Enron. She
1:53
Speaker 1: is rather humble about this. She said it would have
1:56
Speaker 1: collapsed eventually. Anyway. You can't have that my fraud and
2:00
Speaker 1: get away with it forever. But her book is really
2:04
Speaker 1: well regarded. She's subsequently written a number of books, one
2:08
Speaker 1: with Jonah Sarah about uh, Fannie May and Freddy Mack,
2:12
Speaker 1: which is really quite fascinating. She wrote another book on
2:16
Speaker 1: the financial crisis. UM. I find her to be tremendously
2:21
Speaker 1: insightful and really just a pleasure to chat. Without a
2:24
Speaker 1: delightful time talking with her about all these things. And
2:27
Speaker 1: I think you'll hear that in the interview. I wish
2:30
Speaker 1: we had more more time. The hour flew by really quickly,
2:35
Speaker 1: So without any further ado, here is my Conversation with
2:39
Speaker 1: Bethany McClain. This is Masters in Business with Barry Ridholds
2:46
Speaker 1: on Bloomberg Radio. My special guest today is Bethany McClain.
2:51
Speaker 1: She is currently a contributing editor at Vanity Fair, but
2:55
Speaker 1: she is also the author of a number of fascinating books.
2:59
Speaker 1: I would say she's probably best known for Smartest Guys
3:03
Speaker 1: in the Room, The Amazing Rise and Scandalous Fall of
3:07
Speaker 1: and Ron No. Not only was it a award winning book,
3:10
Speaker 1: but it also became a documentary that was nominated for
3:14
Speaker 1: the Academy Awards in two thousand and six. She graduated
3:18
Speaker 1: Williams College and was a double major in math and English.
3:22
Speaker 1: Spent three years at Goldman Sachs as an investment banking
3:26
Speaker 1: m and a analyst before joining Fortune Uh, where she
3:32
Speaker 1: pens a very famous article called is in Run over
3:37
Speaker 1: Priced that ultimately pre sage the collapse of that company
3:42
Speaker 1: and a huge scandal. She's also the author of Shaky Ground,
3:46
Speaker 1: The Strange Saga of US Mortgage Giants, and All the
3:50
Speaker 1: Devils Are Here, The Hidden History of the Financial Crisis.
3:54
Speaker 1: Bethany McClain, Welcome to Bloomberg. Thanks for having me. So
3:57
Speaker 1: so that's quite a fast, sedating background, and there's so
4:01
Speaker 1: many places to go. I have to start with double
4:05
Speaker 1: major English and math, which a lot of people are
4:08
Speaker 1: either word people or number of people. You're both sign
4:12
Speaker 1: of a confused mind. But no, seriously, I don't think
4:16
Speaker 1: you should be one or the other. Somebody asked me
4:17
Speaker 1: recently random question, what what influenced me more being an
4:21
Speaker 1: English major being a math major? And I actually think
4:24
Speaker 1: my math major influences my writing in some ways more
4:27
Speaker 1: because math, particularly theoretical upper level math where it's proofs,
4:31
Speaker 1: is very logical. And I was thinking, I don't have
4:34
Speaker 1: a very aggressive personality, but what makes me aggress But
4:38
Speaker 1: what makes me aggressive is when a doesn't lead to be,
4:41
Speaker 1: doesn't lead to see, And I think that's my training
4:43
Speaker 1: as a math major. And then I can't stand it
4:45
Speaker 1: because I'm looking for the proof right or I'm looking
4:48
Speaker 1: for the logic the logic, and when the logic doesn't
4:50
Speaker 1: add up, that's what will make me dig in and
4:54
Speaker 1: and ask aggressive questions in a way that perhaps isn't
4:56
Speaker 1: isn't my natural personality. I suffer from the same condition.
5:00
Speaker 1: It is a confused state of mind. Because people are
5:02
Speaker 1: usually left the right brain and if you're English and math,
5:05
Speaker 1: it means you're a little of both, and it certainly
5:07
Speaker 1: is confusing. So let's talk a little bit about that
5:11
Speaker 1: takes you to Goldman Sachs in the early nineties, a
5:14
Speaker 1: really tough place to break in. How do you go
5:18
Speaker 1: straight from college to Goldman Sachs's banking division. Well, at
5:21
Speaker 1: that time, Goldman Sachs had an analyst program where they
5:24
Speaker 1: hired people right out of college into their two year
5:27
Speaker 1: analyst program, So there was a pretty established track for
5:31
Speaker 1: for doing that. I don't think I was a natural
5:33
Speaker 1: candidate to be on that track. I think that's true.
5:36
Speaker 1: I didn't I didn't know what investment banking was. Quite frankly,
5:39
Speaker 1: I think I got a job because I was a
5:41
Speaker 1: female math major, and that was rare enough in one
5:43
Speaker 1: of those days that they thought, oh, she must be suitable.
5:46
Speaker 1: It's still relatively rare today, and less so than it was.
5:50
Speaker 1: Um I think I was not very suitable. I think
5:52
Speaker 1: Goldman was a tough place, and I think I made
5:54
Speaker 1: it tougher on myself. I came unprepared. I would say,
6:00
Speaker 1: you knew when you were going in that you were
6:01
Speaker 1: going to work a hundred hour weeks and that the
6:03
Speaker 1: environment was going to be tough. But I don't think
6:05
Speaker 1: I expected it to be quite as as as tough
6:07
Speaker 1: as it was. Um. And you you subsequently called something
6:12
Speaker 1: from that era of the Goldman Sachs post traumatic stress
6:15
Speaker 1: disorder condition? Is that a function of how difficult and
6:19
Speaker 1: challenging a place which I got roundly and perhaps rightly
6:22
Speaker 1: criticized by veterans for for appropriating a term military military veterans,
6:29
Speaker 1: not not not Goldman veterans. But it was. It was.
6:32
Speaker 1: It was. It was a tough environment, yes, but but
6:35
Speaker 1: look I learned a lot. I'm grateful to the place
6:37
Speaker 1: In some ways. I think I grew up quickly there.
6:39
Speaker 1: I can imagine. So you're there for all of three
6:42
Speaker 1: years and you say, hey, this is interesting, but I'm
6:46
Speaker 1: going to give this writing thing a shot, and you
6:49
Speaker 1: end up at Fortune. I actually said, I was out
6:52
Speaker 1: on my way to business school. I was in I
6:53
Speaker 1: had a roommate UM, and I thought, you know, I'm
6:56
Speaker 1: going to graduate from business school with a lot of debt,
6:58
Speaker 1: and I'm going to be right back where I started
7:00
Speaker 1: because I'm gonna need to get a high paying job
7:02
Speaker 1: in order to pay off the deck. So if there's
7:05
Speaker 1: if I want to do something else, now's the time.
7:08
Speaker 1: And I didn't grow up in a family that necessarily
7:10
Speaker 1: encouraged artsy things like journalism. But I thought, now is
7:13
Speaker 1: my time to give it a try, and if I
7:15
Speaker 1: don't like it, I'll go to business school. So I
7:17
Speaker 1: took a huge pay cut and got a job at
7:19
Speaker 1: Fortune as a fact checker. And they were willing to
7:22
Speaker 1: hire me back in those days of well funded, glossy
7:25
Speaker 1: magazines with lots of time to fact check stories before
7:27
Speaker 1: they went out the door, because I had my experience
7:30
Speaker 1: at Goldman, and they thought, well, she may not be
7:32
Speaker 1: able to write, and she may not even be smart,
7:34
Speaker 1: but she at least understands what we're writing about. And
7:36
Speaker 1: this was really little bit pre inter internet, not quite
7:41
Speaker 1: the same cost squeeze that we see today. It was
7:43
Speaker 1: the last golden age of journalism. And so you're there
7:47
Speaker 1: for five or so years. When did you before this
7:51
Speaker 1: story comes out, when did they move you to say,
7:53
Speaker 1: all right, kid, let's see if you can write sort
7:56
Speaker 1: of slowly, but I still definitely I did writing for
7:59
Speaker 1: the Personal Finance section, which at that time was sort
8:01
Speaker 1: of a backwater where nobody wanted to write right for
8:04
Speaker 1: so you could get in the door writing wise if
8:06
Speaker 1: you were willing to do it. And I did this
8:08
Speaker 1: column called Companies to Watch, where I was supposed to
8:10
Speaker 1: pick two stocks every three stocks every two weeks, which
8:13
Speaker 1: is unfortune was published that We're gonna double or triple
8:16
Speaker 1: or quadruple and value. But it was It was easy
8:21
Speaker 1: because of all the people who come by and pitch
8:22
Speaker 1: you right, the analysts and the portfolio managers and the
8:26
Speaker 1: and the company executives, and you can write up these
8:28
Speaker 1: really charming little stories that are great and then you
8:31
Speaker 1: watch the stock goes in the opposite direction. So I
8:33
Speaker 1: began to realize that there was this whole Wall Street
8:37
Speaker 1: by machine that I was inadvertently becoming part of, and
8:39
Speaker 1: I didn't want to be part of it. So in
8:41
Speaker 1: the last minute we have in this segment, you put
8:44
Speaker 1: out the piece is and run over priced. And you've
8:49
Speaker 1: worked with very famous short seller Jim Chanos, a previous
8:53
Speaker 1: guest on the show. How how did he approach you
8:57
Speaker 1: to say, hey, you're probably hearing a lot of positive stuff.
9:00
Speaker 1: Use a story that might not be quite as savory
9:02
Speaker 1: as the others. So I met a guy named Doug Millette,
9:06
Speaker 1: who has since passed away, who worked for Jim Um
9:09
Speaker 1: and I hounded Doug mercilessly to talk to me and
9:12
Speaker 1: help me come up with ideas, and um, finally Doug said, Hey,
9:16
Speaker 1: you know, we're looking at this company called Enron. If
9:18
Speaker 1: you can tell us how it makes money, what would
9:20
Speaker 1: love to hear it? And so that was that was
9:22
Speaker 1: actually how it came about. I'm Barry Ridhults. You're listening
9:25
Speaker 1: to Masters in Business on Bloomberg Radio. My special guest
9:28
Speaker 1: today is Bethanie McClean. She is a journalist and author
9:33
Speaker 1: of Smartest Guys in the Room, Amazing Rise and Scandalous
9:37
Speaker 1: Fall of Enron. And we were talking um earlier about
9:42
Speaker 1: when the book came out. It kind of came out
9:45
Speaker 1: in two way dot com implosion void And despite how
9:50
Speaker 1: well regarded the book is today, not a lot of
9:53
Speaker 1: people really saluted when that came out. No, the book
9:56
Speaker 1: came out into a weird vacuum. I would say people
9:58
Speaker 1: were really interest didn't end round when it went bankrupt, right,
10:01
Speaker 1: and it was all over the front page of every paper.
10:04
Speaker 1: Fastest Bankruptcy in American His Your Biggest Bankruptcy, just all
10:07
Speaker 1: sorts of it on the front page of the paper
10:09
Speaker 1: for a year. Everybody was covering by the by the
10:11
Speaker 1: time our book came out in the fall of two
10:13
Speaker 1: thousand and three, I think people had end round fatigue,
10:15
Speaker 1: and I think she had scandal fatigue. And I think
10:17
Speaker 1: we were all in that awful period after the dot
10:19
Speaker 1: com implosion where the last thing you wanted was more
10:22
Speaker 1: bad news. Plus you had the world com collapse, and
10:24
Speaker 1: you had the analyst scandal, and there was all these
10:26
Speaker 1: other things, and people might have been really like right,
10:29
Speaker 1: So the book barely cracked the best seller list and
10:32
Speaker 1: then it it sort of disappeared, but it continued to
10:35
Speaker 1: sell over the years, and actually, because it sold so
10:37
Speaker 1: well over the years, it ended up doing really well.
10:39
Speaker 1: But it was a slow thing, not a not an
10:41
Speaker 1: immediate explosion of interest. It ultimately ended up on a
10:45
Speaker 1: number of either college or business school reading lists. So
10:49
Speaker 1: it's a regular, literally required reading for certain students, I hope.
10:54
Speaker 1: So so, so let's talk a little bit about the
10:57
Speaker 1: initial article. Was it a function when you were reading
11:01
Speaker 1: it of overvaluation or did you think fraud? I was
11:06
Speaker 1: too naive to think fraud, I think, but if you
11:09
Speaker 1: if you try to put yourself back at that point
11:11
Speaker 1: in time. We hadn't had fraud in a major American
11:14
Speaker 1: business for such a long time. The idea that a
11:17
Speaker 1: company could be fraudulent, that the accountants and lawyers could
11:20
Speaker 1: have signed off on things, I just I wouldn't have
11:22
Speaker 1: believed it. I remember reading through the description of the
11:25
Speaker 1: transactions that the CFO, Andy Fasta, was doing with with
11:28
Speaker 1: the company and thinking, Yeah, but the accountants and lawyers
11:31
Speaker 1: signed off on this, I must I must just not
11:33
Speaker 1: get it. So these weird disclosures about these transactions that
11:36
Speaker 1: ended up being very central to the end Roun story,
11:38
Speaker 1: I didn't even write about in my story. I instead
11:41
Speaker 1: focused on end Roun's price and it's pe ratio relative
11:45
Speaker 1: to the fact that people didn't understand its business, didn't
11:47
Speaker 1: understand how it made money, and that although the company
11:50
Speaker 1: said it wasn't a trading business because Jeff Skilling, the
11:53
Speaker 1: then CEO, wanted it to have a higher stock price,
11:55
Speaker 1: it was very much a trading business. So I focused
11:58
Speaker 1: on that fraud. I think it would have I think
12:01
Speaker 1: it would have surprised me. Well, it's certainly surprised a
12:04
Speaker 1: lot of people, especially those who were long the stock.
12:07
Speaker 1: And we mentioned the previous segment, um uh, folks from
12:12
Speaker 1: Jim Chainos's funds, can A Coast Partners? Had you had
12:16
Speaker 1: reached out to them? This wasn't them shopping and around
12:19
Speaker 1: you had tag them? What made you go to them
12:21
Speaker 1: of all people? Well, I think going back to this column,
12:24
Speaker 1: I did companies to watch where I was selecting these
12:27
Speaker 1: stocks to write about. I felt burned. I felt like
12:29
Speaker 1: I was inadvertently becoming part of this buy machine that
12:32
Speaker 1: was succoring the American public by writing these positive stories
12:35
Speaker 1: about companies that were soon to implode. So I began
12:38
Speaker 1: to seek out short sellers and try to get to
12:39
Speaker 1: know them because I thought I need another source of information.
12:42
Speaker 1: You know, I'm tired of writing this glowing story about
12:44
Speaker 1: this company, not hearing another point of view, only to
12:46
Speaker 1: have my phone ring and somebody start, you know, swearing
12:48
Speaker 1: at me on the other end, being like you stupid whatever,
12:50
Speaker 1: How could you not have known that this is? Did
12:52
Speaker 1: that really? Have? It did a couple of times, and
12:54
Speaker 1: I thought, you know, I need to at least understand
12:56
Speaker 1: the other side of the story, even if they're wrong.
12:58
Speaker 1: I want to know it and then I can do
13:00
Speaker 1: my own thinking to figure out if they're right or wrong.
13:02
Speaker 1: So trying to get to know Jim was part of
13:04
Speaker 1: a broader effort on my part of trying to get
13:06
Speaker 1: to know people who are skeptics so that I could
13:08
Speaker 1: doom with things that were more accurate. So with with
13:11
Speaker 1: the benefit of hindsight, it seems kind of ridiculous that
13:14
Speaker 1: here's a company. They make money in ways that no
13:19
Speaker 1: one really knows. Their books are completely forget transparent, they're impenetrable.
13:24
Speaker 1: Nobody has any idea what's going on with that? How
13:27
Speaker 1: did the best and brightest of corporate America, of Wall Street,
13:31
Speaker 1: of the investment community not stop to think, Hey, what's
13:35
Speaker 1: really going on here? How did everybody buying into the
13:39
Speaker 1: story which turns out to just be complete and total fraud.
13:44
Speaker 1: I think there are a bunch of answers to that.
13:45
Speaker 1: I think one thing is that we like the story, right.
13:47
Speaker 1: We all want to believe in the story of this
13:50
Speaker 1: company that's revolutionizing markets and that's going to make everybody
13:52
Speaker 1: a fortune. What could possibly be wrong with that? But
13:55
Speaker 1: I think underneath it there are some things that are
13:57
Speaker 1: specific to end Run. I think Jeff Skilling was a
13:59
Speaker 1: really powerful personality and the biggest a very intellectually convincing personality,
14:05
Speaker 1: and charismatic personality and intimidating personality, and the most the
14:09
Speaker 1: greatest compliment he could give you was that you got it,
14:12
Speaker 1: was that you you were part of the team. You
14:13
Speaker 1: got it, you understood what they were doing. The biggest
14:16
Speaker 1: insult he could give was that you didn't get it.
14:18
Speaker 1: You're too stupid. You're too stupid. And so people, because
14:21
Speaker 1: we get it, we're the smartest guys in the room,
14:23
Speaker 1: you don't write. And he would say this to people
14:26
Speaker 1: who were Harvard, M. I. T. Wharton, like really the
14:31
Speaker 1: best and brightest, and literally intimidate them into thinking, you're
14:35
Speaker 1: not smart enough to understand what we do, right, And
14:37
Speaker 1: so people were afraid of feeling like that, are being
14:39
Speaker 1: made to look like that in a crowd, and so
14:41
Speaker 1: I think a lot of people pretended to get it
14:43
Speaker 1: when they really didn't get it because they wanted to
14:46
Speaker 1: bask in Jeff Skillings admiration. I think it happens far
14:49
Speaker 1: more frequently than you would think, even today, though I
14:51
Speaker 1: think it's a common phenomenon. It's the Emperor's new clothes
14:54
Speaker 1: right when we live with it today, that is um
14:59
Speaker 1: absolutely stun so. Someone I mentioned I was interviewing you,
15:02
Speaker 1: and someone said to me and we talked about the article,
15:05
Speaker 1: and the question that this person asked was interesting enough
15:07
Speaker 1: that I'm gonna pass it along. Assume your article never
15:12
Speaker 1: came out. Is en run over priced? How long could
15:15
Speaker 1: this have continued before someone would have noticed that the
15:20
Speaker 1: emperor was not wearing any clothes. I actually don't think
15:23
Speaker 1: that my article influenced en Roun's trajectory at all. I
15:27
Speaker 1: think what my article did was pick up on the
15:29
Speaker 1: underlying skepticism about en Ron that was growing in the marketplace.
15:33
Speaker 1: And in the end, what brought en run down was
15:34
Speaker 1: a funding crisis, right, they couldn't roll their debt, and
15:37
Speaker 1: then the rating agencies rating agencies downgraded them, and that
15:40
Speaker 1: was the final nail in the coffin um. But I
15:43
Speaker 1: think my article highlighted because it was at that that
15:46
Speaker 1: time where it was becoming undeniable that the broadband business,
15:49
Speaker 1: for instance, was collapsing, and Jeff Skilling was continuing to say,
15:52
Speaker 1: this is a great business for en Ron. We're defying
15:55
Speaker 1: the industry, and it was becoming more and more apparent
15:57
Speaker 1: than what he was saying was at odds with what
15:59
Speaker 1: everybody in the industry was was was saying. So I
16:02
Speaker 1: guess I believe it probably didn't. My article probably didn't
16:05
Speaker 1: influence the trajectory of events at all. I think it.
16:08
Speaker 1: I think it explained what was starting to happen. So
16:10
Speaker 1: at the time he was saying that you already had Metromedia,
16:13
Speaker 1: Fiber Go belly up, you had Global Cross and go
16:15
Speaker 1: belly up. They were spending thousands of dollars per mile
16:19
Speaker 1: to lay this dark cable that will eventually light up
16:22
Speaker 1: with all this content, which turned out to be true
16:24
Speaker 1: Facebook and YouTube and all these things a decade later.
16:27
Speaker 1: But that was brought up for pennies on the dollar later.
16:31
Speaker 1: How can someone be so brazen as to make that
16:34
Speaker 1: claim in the face of collapse. Was it just oh,
16:38
Speaker 1: those were poorly run companies and people brought into that.
16:41
Speaker 1: I think that Jeff Jeff was the ultimate stock salesman.
16:44
Speaker 1: He could sell and run better than anybody else, and
16:47
Speaker 1: he desperately needed to keep the stock price high or
16:49
Speaker 1: high because all these complicated financial things Andi Fasto the
16:53
Speaker 1: CFO had built depended on keeping the stock price above
16:56
Speaker 1: a certain level, and if the stock price started to decline,
16:58
Speaker 1: all these losses would come back on and Ron's balance sheet.
17:01
Speaker 1: So I think Jeff was very aware of the need
17:03
Speaker 1: to keep Enron's and Roun stock price high UM, and
17:07
Speaker 1: I think that was part of it. Just share desperation
17:09
Speaker 1: UM to en Ron was is a great example of
17:12
Speaker 1: you know, the famous quote is a Pendiman Graham that
17:15
Speaker 1: a stock in a company are two different things. And
17:17
Speaker 1: Enron's case, the company became the stock to say the least.
17:20
Speaker 1: I'm Barry Hults. You're listening to Masters in Business on
17:23
Speaker 1: Bloomberg Radio. My special guest today is Bethany McClain. She
17:27
Speaker 1: is a former Goldman Sachs analyst and Fortune magazine reporter
17:31
Speaker 1: who broke the big story on en Ron, ultimately writing
17:35
Speaker 1: a number of really well regarded books. And let's talk
17:38
Speaker 1: about a different book of yours, which is shaky ground.
17:42
Speaker 1: The strange saga of the US mortgage giants. Now, I've
17:47
Speaker 1: covered subprime, and I've covered mortgages, and whenever I talked
17:52
Speaker 1: about Fannie or Freddie, the two government sponsored enterprises that
17:57
Speaker 1: handle most of the mortgages in the country, they are
18:00
Speaker 1: one of two reactions. Either people are furious and they
18:03
Speaker 1: want to shut them down, and let's turn this over
18:06
Speaker 1: the free market or their eyes glaze over and they
18:09
Speaker 1: lovingly slip into a coma never to be seen again.
18:12
Speaker 1: But nothing in the middle. What do you find when
18:14
Speaker 1: you talk about mortgages? I went to a housing finance conference,
18:17
Speaker 1: the Goldman Sachs speaking of which hosted um when in
18:20
Speaker 1: the winter, when I was working on the book, I
18:22
Speaker 1: guess it was last winter, and the Goldman Pierre guy
18:24
Speaker 1: said what are you doing here? And I said, well,
18:25
Speaker 1: I'm writing a book about Fanny and Freddie. And he
18:27
Speaker 1: looked at me and he said, well, no one's going
18:28
Speaker 1: to read that, and just how book sales going, you
18:32
Speaker 1: know what? For what it is, so I published it
18:34
Speaker 1: through this upstart publishing press called Columbia Global Reports, which
18:38
Speaker 1: seeks to write mini books. So it's not a long book.
18:40
Speaker 1: But many books on topics of global importance that are
18:43
Speaker 1: there are meant to be walkier. So for what it is,
18:45
Speaker 1: it's actually done quite well. Okay, that's great. It's every
18:49
Speaker 1: time the conversation comes up, it's just so difficult, and
18:53
Speaker 1: it's amazing because mortgages. Look, anybody should care about Fannie
18:56
Speaker 1: and Freddie. I don't care who you are, if you
18:58
Speaker 1: have a mortgage or if you want to buy a
19:00
Speaker 1: ho If you want to buy a house, you should care.
19:01
Speaker 1: If you just own a house, you should care about
19:04
Speaker 1: what the government's going to do with mortgage finance because
19:06
Speaker 1: the availability of financing determines the value of your house.
19:09
Speaker 1: And if you're in none and homes are still, by
19:11
Speaker 1: the way, the most important asset to most Americans for
19:13
Speaker 1: the vast majority. And if you are in neither of
19:15
Speaker 1: those camps, but you care about the economy, you should
19:17
Speaker 1: still care about housing because it's still fift our g
19:20
Speaker 1: d P and so whatever the government does full fifth.
19:24
Speaker 1: So whatever the government does to resolve we are still
19:26
Speaker 1: housing is still There was a great quote Mariner Mariner
19:29
Speaker 1: Echoes back in the nineteen thirties who said housing is
19:32
Speaker 1: the wheel within the wheel of our economy. And it
19:34
Speaker 1: and it still is. And so even if you care
19:37
Speaker 1: about the just care about the economy, you should care
19:39
Speaker 1: about what the government does with Fannie and Freddie. Ultimately,
19:41
Speaker 1: that's it's it's a big topic. I did a column
19:44
Speaker 1: don't care here right. I did a column not too
19:46
Speaker 1: long ago. I moved a year ago. We bought a
19:48
Speaker 1: new house, and the experience with that house, the hoops
19:51
Speaker 1: you had to jump through in versus the experience with
19:56
Speaker 1: the prior house we did. I recalled doing the refinancing
19:59
Speaker 1: in OH five or oh four, where literally the guy
20:03
Speaker 1: would pull up in the driveway, you left the engine running,
20:05
Speaker 1: flung open the door, ran in with papers here initial
20:08
Speaker 1: initial sign sign I apologize, I have a closing around
20:11
Speaker 1: the corner. I disappeared, left us with the check for
20:14
Speaker 1: thirty dollars was gone, and I looked at my wife.
20:17
Speaker 1: Did that really happen? Contrast eight years later, where you know,
20:22
Speaker 1: I've had colonoscopies that were gentler and easier and less
20:26
Speaker 1: intrusive than than these sort of um experiences. So that
20:32
Speaker 1: raises the question, why has financing, the most important purchase
20:38
Speaker 1: most Americans make, become so insane? Well, there are a
20:42
Speaker 1: bunch of answers to that. The fate of Fannie and Freddie,
20:45
Speaker 1: as most people know, it's unresolved. They were put into
20:47
Speaker 1: a state called conservatorship during the dark depths of the
20:49
Speaker 1: financial crisis. It was supposed to be temporary. There they
20:52
Speaker 1: still said, they're making lots of government money. The government
20:55
Speaker 1: is using their money to reduce the overall budget deficit.
20:58
Speaker 1: I think it's a huge scandal, But that's but and
21:00
Speaker 1: that's been reported that, but that's out there. But the
21:03
Speaker 1: big problem is that the government's been schizophrenic and what
21:06
Speaker 1: it wants out of the mortgage market. So politicians, including
21:09
Speaker 1: President Obama have said repeatedly, we want more private capital
21:12
Speaker 1: in the market. At the same time they've done everything
21:14
Speaker 1: possible to discourage private capital from getting involved in the market. Again,
21:18
Speaker 1: witnessed the huge fines the big banks have paid, um so,
21:21
Speaker 1: and so what are the big banks paying fines? Well
21:25
Speaker 1: for for behavior for which they should pay fines. But nonetheless,
21:28
Speaker 1: if you realize suddenly that you Mr. Bank may have
21:31
Speaker 1: to pay billions of dollars in fines because you screwed
21:34
Speaker 1: up on some lending to subprime customers, you're probably gonna say,
21:36
Speaker 1: you know, I don't think I'm gonna do that. Len,
21:37
Speaker 1: Let let me push back on that a little bit,
21:39
Speaker 1: because I know you've written about foreclosure gate, which is
21:42
Speaker 1: one of my big pet peeves. Yes, as it turns out,
21:46
Speaker 1: if you actually commit fraud and take these signed documents
21:51
Speaker 1: and present them to a court, they're usually a penalty
21:55
Speaker 1: for for lying under oath that way. And yet it
21:58
Speaker 1: seems there has been no one woman one mid level
22:02
Speaker 1: executive who was just a irrelevant to the whole story
22:06
Speaker 1: got prosecuted. But the vast majority of people who said,
22:09
Speaker 1: just make up documents, throw people out of the house.
22:12
Speaker 1: We'll probably get the right people agreed. Agreed. I'm not
22:15
Speaker 1: defending the big banks. Nonetheless, if you say, if you
22:19
Speaker 1: penalize something for doing something bad, they're probably going to say,
22:21
Speaker 1: I'm not going anywhere near that bad thing in the future.
22:24
Speaker 1: And maybe we'll get there, But before we get there,
22:26
Speaker 1: the government has to figure out what it's for. All
22:28
Speaker 1: in the market is going to be right and right now,
22:30
Speaker 1: there's no resolve about what the government's going to do
22:32
Speaker 1: with Fannie and Freddie. So the present political function, or
22:34
Speaker 1: a political malfunction, is that what it is. It's not economic,
22:38
Speaker 1: it's it's basically nobody in Washington knows what to do
22:41
Speaker 1: with these two companies, and so we have complete and
22:43
Speaker 1: total stalemate. Everybody knows we need Fannie and Freddie to
22:47
Speaker 1: keep providing a thirty or fixed rate mortgage to the
22:49
Speaker 1: majority of Americans. Nobody really seriously wants to risk ripping
22:53
Speaker 1: that underpinning out from under the mortgage market and see
22:55
Speaker 1: what happens. And yet nobody can say, actually, we probably
22:59
Speaker 1: need Fannie and Freddie either. So we sit in the
23:02
Speaker 1: state of dysfunction, made worse by the fact that the
23:04
Speaker 1: government has gotten two hundred plus billion dollars in profits
23:08
Speaker 1: from Fannie and Freddie because they're seizing all the profits,
23:10
Speaker 1: and so what politician wants to get rid of that
23:12
Speaker 1: source of money. So I think it's it's it's not
23:15
Speaker 1: a great situation. I'm Barry rid Halts. You're listening to
23:18
Speaker 1: Masters in Business on Bloomberg Radio. My special guest today
23:22
Speaker 1: is Bethany McLean. She is a contributing editor at Vanity
23:25
Speaker 1: Fair and uh well regarded journalist and author. Let's talk
23:31
Speaker 1: about one more book of yours, which I happened to
23:34
Speaker 1: have pulled off my bookshelf. All the Devils Are Here,
23:38
Speaker 1: The Hidden History of the Financial Crisis, which you actually
23:41
Speaker 1: wrote with the Jonah Sarah. He's a really interesting Uh.
23:45
Speaker 1: Joe was my longtime editor at Fortune and he actually
23:48
Speaker 1: edited the End Round book. Oh really, I didn't know that.
23:52
Speaker 1: I'm a fan of his only because I have big
23:55
Speaker 1: issues with the n c a A. And he's been
23:57
Speaker 1: well for many reasons, but most recently he's been torching
24:02
Speaker 1: them read his new book in Denschard. It just came out,
24:04
Speaker 1: just came out presolutely. He's absolutely I love the fact
24:09
Speaker 1: that these guys have gotten away with so much for
24:12
Speaker 1: so long, and suddenly one person comes along and completely changes,
24:17
Speaker 1: you know, the narrative. The story is something wholly different,
24:20
Speaker 1: and that's it's nice having a free press. So let's
24:23
Speaker 1: talk a little bit about this book because it's really interesting,
24:26
Speaker 1: and we could talk about a number of other columns
24:29
Speaker 1: that you've released following the financial crisis, some of which
24:34
Speaker 1: I find endlessly fascinating. Let's just jump right to this.
24:38
Speaker 1: What was the hidden history within the financial crisis? What
24:42
Speaker 1: do you think most people just don't realize that took
24:46
Speaker 1: place in that whole collapse. I think one of the
24:50
Speaker 1: most surprising things, okay, two of the most surprising things
24:52
Speaker 1: to me where the whole history of subprime lending, how
24:54
Speaker 1: it developed. So even sophisticated people tend to think of
24:57
Speaker 1: subprime lending as a phenomenon in the mid tooth, but
25:00
Speaker 1: it really wasn't. There was the first wave of subprime
25:02
Speaker 1: lending in the nine in the nineties, and then the
25:05
Speaker 1: second wave in the two thousands, which was run by
25:07
Speaker 1: the executives of the companies that that first proliferated in
25:11
Speaker 1: the nineties. So understanding how that happened and the regulatory
25:15
Speaker 1: response to it that made it, that made subprime lending
25:18
Speaker 1: something that nobody in Washington would would rain in, I
25:21
Speaker 1: think to me is a really important part of part
25:24
Speaker 1: of this story. It's funny you said one or two
25:26
Speaker 1: things that people don't know. I have like listen list
25:29
Speaker 1: of things that people are always surprised at. One of
25:32
Speaker 1: the things that came up recently, Hey, how come it
25:35
Speaker 1: was that all Wall Street banks got killed in subprime
25:39
Speaker 1: except one JP Morgan? Why Why is that? Because they
25:42
Speaker 1: had their subpront crisis in the early two thousands and
25:44
Speaker 1: when they went to get out of it, it was
25:46
Speaker 1: actually buyers for their paper. Very interesting. Yeah, a huge
25:52
Speaker 1: difference from everybody else, right, But that's a really it's
25:55
Speaker 1: a really important part of the story for a bunch
25:57
Speaker 1: of reasons. One is because consumer advocates were going to
26:00
Speaker 1: Alan Green's fan then the chairman of the FED in
26:02
Speaker 1: the nineties and saying basically, look, people are getting loans
26:05
Speaker 1: they can't pay back. Something's going wrong in the system.
26:07
Speaker 1: And greens Band would say, what a lot of regulators
26:09
Speaker 1: and politicians thought, which is that the market doesn't work
26:12
Speaker 1: that way. People banks, lenders won't make loans. Banks certainly
26:15
Speaker 1: won't buy up loans and securitize them. Investors won't buy
26:18
Speaker 1: the resulting securities if the underlying loans aren't sound. A
26:21
Speaker 1: market economy doesn't work that way. And so I think
26:24
Speaker 1: he let his ideology get in the way of the facts,
26:26
Speaker 1: which I think about that a lot is a good
26:28
Speaker 1: as a good as a good life lesson. But I
26:31
Speaker 1: think a lot of people did not Not only did
26:33
Speaker 1: consumer advocates, but on the Federal Reserve Board was a
26:37
Speaker 1: gentleman named um was Bill Pool. I thought it was
26:40
Speaker 1: Ed Graham Graham. That's right. Bill Pool is still around
26:42
Speaker 1: and grahamar unfortunately passed away and Ed grahamlock. I think
26:46
Speaker 1: maybe Billpool did the intro to his book. That's why
26:48
Speaker 1: it's on my head. Ed Graham look was saying, hey,
26:51
Speaker 1: none of these things makes sense. I understand what you're saying,
26:55
Speaker 1: but look, here's all of your predatory, predatory owns that
27:00
Speaker 1: are defaulting in these huge numbers, and amongst the many
27:05
Speaker 1: things that people don't realize in oh five, uh, I
27:09
Speaker 1: think it was the o c C issued an edict
27:11
Speaker 1: to the States that said, you cannot enforce predatory lending
27:15
Speaker 1: laws against banks. That's our it was. It was preemption
27:19
Speaker 1: and and the o c C thought that subprime lending
27:23
Speaker 1: was contained outside the banking system. And I think that's
27:26
Speaker 1: another huge lesson for the modern world. You know, our market,
27:29
Speaker 1: the global markets are very complex place, and people don't
27:32
Speaker 1: see all the interdependencies and interconnectedness until it's too late.
27:35
Speaker 1: And that's one reason why the financial crisis is still
27:38
Speaker 1: so relevant because people said, oh, the subprime lending thing, Well,
27:41
Speaker 1: it's all these lenders, these little shops out in California,
27:44
Speaker 1: and so it really cares. It's not infiltrating our precious
27:46
Speaker 1: banking system. But oh yes it was. That's right on
27:50
Speaker 1: one another. One of the many things that people probably
27:52
Speaker 1: didn't know when they were selling these thirty year mortgages
27:55
Speaker 1: to Wall Street to securitize into a new new paper,
27:59
Speaker 1: um came with a warranty like a toaster. Wait, I'm
28:04
Speaker 1: warranting that this thirty year loan against a house that
28:08
Speaker 1: could last a hundred years at the last three months,
28:11
Speaker 1: so we promised they'll make the first three payments. How
28:14
Speaker 1: crazy is that it's astonishing. It's completely astonishing. And it's
28:18
Speaker 1: interesting in light of Fannie and Freddie, as we discussed,
28:20
Speaker 1: because you know, there's been a whole political movement to
28:22
Speaker 1: blame Fanny and Freddie, blame low income and lending to
28:26
Speaker 1: low income borrowers and home ownership for the financial crisis,
28:29
Speaker 1: and when you actually look at the history of it,
28:31
Speaker 1: I might have gone into my book thinking that was true.
28:33
Speaker 1: When you look at the history of it, then you see, oh, no, no, no.
28:36
Speaker 1: This whole subprime lending thing that started in the ninety
28:39
Speaker 1: nineties was enabled by Wall Street, had nothing to do
28:41
Speaker 1: with Fanny and Freddie. It started outside Fanny and Freddie.
28:45
Speaker 1: The other fascinating thing to me that I think most
28:46
Speaker 1: people don't realize about the subprime crisis was that it
28:49
Speaker 1: was not about home ownership. If risky loans had been
28:52
Speaker 1: limited to first time homebuyers, we never would have had
28:54
Speaker 1: a crisis. It was cash out refies. So this so
28:57
Speaker 1: this the crisis doesn't prove that giving mortgages to poor
29:00
Speaker 1: people as a bad idea, as a lot of people
29:02
Speaker 1: seem to think. It doesn't prove home ownership one way
29:04
Speaker 1: or the other. What it proves is that extending credit
29:07
Speaker 1: to people of any income level who can't afford to
29:09
Speaker 1: pay it back. It's a really bad idea. So I
29:12
Speaker 1: think that's another huge misconception and kind of an evil
29:14
Speaker 1: misconception about the crisis. Right, So there's so many components
29:18
Speaker 1: to that. One is, you have a population that's not
29:22
Speaker 1: seeing their wages go up, especially in the two thousands
29:25
Speaker 1: when there's really high inflation. So flat wage is high
29:29
Speaker 1: inflation means your standard of living is falling unless you
29:32
Speaker 1: have a way to get more money. And the cash
29:34
Speaker 1: out reflies, which, like Endron, it works as long as
29:38
Speaker 1: this price keeps going up. Once that stops, well, when
29:41
Speaker 1: the music stops, that's where the real trouble comes. And
29:43
Speaker 1: you drive through Chicago streets and you see in the
29:46
Speaker 1: dirty snow, flat flapping banner from Chase that says let
29:49
Speaker 1: your home, take you on vacation, and you say, not
29:52
Speaker 1: so much. Take you on vacation, get you a big
29:54
Speaker 1: screen TV, buy you a new car, all standard of
29:58
Speaker 1: living things, and that's really eating your sat coorn. But
30:00
Speaker 1: you're absolutely right. The underlying stories of the stagnation and
30:03
Speaker 1: American incomes, right, that was masked for a while by
30:06
Speaker 1: the creation of credit, and I think that's a huge
30:08
Speaker 1: underlying story that we have yet to see play out.
30:11
Speaker 1: Creation of credit, flat wages, and when people are talking
30:14
Speaker 1: about income inequality, there are two sides. Yeah, the top
30:18
Speaker 1: one tenth doing great with stock market and all sorts
30:22
Speaker 1: of other things, but there's a huge swath of the
30:24
Speaker 1: country that's just seeing stagnant wages. And when you say
30:28
Speaker 1: to people who aren't used to having free money, hey,
30:32
Speaker 1: here's free money, I mean that story I mentioned about
30:35
Speaker 1: us doing the cash out refly, so we got starter house,
30:40
Speaker 1: replaced a kitchen, and I know neighbors who were why
30:44
Speaker 1: is there a portion your little starter house driveway? Well,
30:48
Speaker 1: because I can't. And it gets to another huge issue
30:51
Speaker 1: about our society too, which is that a lot of
30:53
Speaker 1: people aren't financially sophisticated enough to understand these products. So
30:57
Speaker 1: they assume if the lender is giving them the money,
30:59
Speaker 1: then the lenders that and the lender knows that they
31:01
Speaker 1: can pay it back and the lender has done the work.
31:03
Speaker 1: And that's obviously a really bad assumption. But lenders, especially
31:06
Speaker 1: mortgage brokers, are trained to be your friend and say
31:08
Speaker 1: it's all going to be okay in the end. So
31:11
Speaker 1: I'm a big believer in personal responsibility, but I think
31:13
Speaker 1: responsibility has to go two ways. And you can't put
31:16
Speaker 1: it all on people and then have financial services institutions
31:19
Speaker 1: out there selling bad products that they're trying it just
31:22
Speaker 1: it doesn't work that way. Responsibility is a two way story.
31:24
Speaker 1: Thanks to the Consumer Finance Protection Board, is a direct
31:28
Speaker 1: result of the exact sentiment you mentioned the other the
31:31
Speaker 1: other thing that people forget when we talk about or
31:35
Speaker 1: or don't know. You know, Fannie and Freddie they got
31:38
Speaker 1: into subprime. Yeah, they got into subprime. They petition o
31:41
Speaker 1: FAIO later oh five because they were losing so much
31:45
Speaker 1: market share to Wall Street. Hey, the subprime is where
31:48
Speaker 1: the growth is. All our business is going away. If
31:50
Speaker 1: you don't let us compete with them in the subprime space,
31:53
Speaker 1: we're not gonna have any business. So they jumped in
31:56
Speaker 1: around oh six just as the market was topping the
31:59
Speaker 1: time and couldn't have been better. And that's why their
32:01
Speaker 1: losses were so bad. But that's actually fascinating because you know,
32:04
Speaker 1: there are forces in the government that wanted to see
32:06
Speaker 1: the private label Wall Street market take over Fanny and
32:09
Speaker 1: Freddy's market share, and there was a big change in
32:12
Speaker 1: around I think it went into effect around O one
32:13
Speaker 1: or O two that allowed these Wall Street created mortgage
32:17
Speaker 1: backed securities that got triple A ratings to be treated
32:20
Speaker 1: the same way for capital purposes as Fanny and Freddy
32:23
Speaker 1: back securities. The two things are obviously totally different. One
32:26
Speaker 1: is a creation of the credit rating agency process. The
32:29
Speaker 1: other actually had two companies standing behind them saying we'll
32:31
Speaker 1: pay if the homeowner can't. Plus the United States government
32:34
Speaker 1: behind those two, right, But the banking lobby got them
32:37
Speaker 1: treated the same way for capital purposes. And that's what
32:40
Speaker 1: unleash the crave of craze of some prime lending. So
32:43
Speaker 1: let's use that as a leaping off point to look
32:45
Speaker 1: at some of the columns you have written and on
32:47
Speaker 1: the rating agencies UM subject you wrote, if everyone hates
32:52
Speaker 1: the creating credit rating agencies, why won't anyone enforced dot
32:57
Speaker 1: frank provisions to dethrone them? So I have to ask
32:59
Speaker 1: you what are the provisions and why has that not happened? Well,
33:03
Speaker 1: some of it has in limited ways. The SEC is trying, um,
33:08
Speaker 1: but very ineffectively. Um. The main thing that was supposed
33:12
Speaker 1: to happen, and the big issue is the way credit
33:14
Speaker 1: rating agencies have been enshrined in regulations, making them making
33:18
Speaker 1: them critical arbiters. And the idea and Dodd Frank was
33:21
Speaker 1: we were going to take them out of all the
33:22
Speaker 1: regulatory framework, and that is not happening. People have basically
33:25
Speaker 1: admitted it's really difficult. It's really hard to do. And
33:28
Speaker 1: part of the problem is that institutional investors love being
33:32
Speaker 1: able to blame the credit rating agencies when it all
33:34
Speaker 1: goes wrong, and so they don't necessarily they kind of
33:37
Speaker 1: like being able to say, but the credit rating agencies
33:39
Speaker 1: said it was so um. So there are a lot
33:41
Speaker 1: of forces against any any reform. And the clearest way
33:44
Speaker 1: you can see that is if you remember that the
33:47
Speaker 1: credit rating agencies were already reformed before the financial crisis.
33:50
Speaker 1: In the wake of en Run, when they famously rated
33:53
Speaker 1: en Run's debt investment grade up until two days before
33:55
Speaker 1: it's collapsed, there was a huge outcry about the credit
33:58
Speaker 1: rating agencies, and in two thousand and set Congress past
34:00
Speaker 1: the credit rating agency reformat. So did you know that
34:04
Speaker 1: heading into the financial crisis, the credit rating agencies has
34:06
Speaker 1: had already been reformed. And once once you know that,
34:09
Speaker 1: you realize why nothing is happening. If people want to
34:12
Speaker 1: find your work, where would they track you down? Mainly
34:16
Speaker 1: through Vanity Fair, but I guess you can google me.
34:19
Speaker 1: You can buy my books on Amazon if you're interested.
34:22
Speaker 1: If you've enjoyed this conversation, be sure and hang around
34:25
Speaker 1: for the podcast extras, where we keep the tape rolling
34:27
Speaker 1: and continue chatting. Be sure and check out my daily
34:30
Speaker 1: column on Bloomberg View dot com or follow me on
34:34
Speaker 1: Twitter at rid Halts, where I tweet a little more
34:37
Speaker 1: than once a week or so. I'm Barry rid Halts.
34:39
Speaker 1: You've been listening to Masters in Business on Bloomberg Radio.
34:43
Speaker 1: Welcome to the podcast portion of the show. This is
34:46
Speaker 1: where we take off our shoes and kick back a
34:48
Speaker 1: little bit. I'm literally taking my shoes off, Bethany. Thank
34:51
Speaker 1: you so much for doing this. This is really quite
34:54
Speaker 1: interesting stuff. You and I have an interest in a
34:57
Speaker 1: lot of similar wonky, tedious, boring stuff. That's true. The
35:04
Speaker 1: Dick Fold thing, So did you know that about it?
35:07
Speaker 1: I did not know that story. There was a Bloomberg
35:09
Speaker 1: article on it, and I've had this conversation with countless people.
35:14
Speaker 1: They're like, no, no, if he was offered money by Buffett,
35:17
Speaker 1: he would have had to take it. Not only was
35:19
Speaker 1: he offered money by Buffett, he was offered more money
35:23
Speaker 1: then a better deal than what ultimately now six months
35:27
Speaker 1: later obviously was a much uglier situation after following the
35:32
Speaker 1: collapse of Lehman Brothers. But um talk talk about reality
35:36
Speaker 1: distortion field and being a salesman and surrounding yourself with
35:40
Speaker 1: people who are afraid to say no to you. That's
35:43
Speaker 1: a This is a not uncommon set of circums now
35:48
Speaker 1: except now, which I think is almost worse. If you
35:50
Speaker 1: talk to any leader, they're going to tell you that
35:52
Speaker 1: they surround themselves with people who challenge them and that
35:55
Speaker 1: they really like being challenged. And as soon as I
35:57
Speaker 1: hear that, my bsmter goes off because I know it's
36:00
Speaker 1: not true. Nobody likes being challenged. The trick is to
36:02
Speaker 1: do it anyway. So if I hear an honest leader,
36:05
Speaker 1: they say, I really hate being challenged, but I make
36:07
Speaker 1: myself undergo it anyway. Now that's honesty. The other if you,
36:11
Speaker 1: if you've read some of the Bridgewater stuff, what what
36:14
Speaker 1: Dahio has created in terms of some people have called
36:18
Speaker 1: it a cult. I think that goes too far, but
36:20
Speaker 1: it's a really interesting culture. Where so there's another book
36:24
Speaker 1: Um Originals by Adam Grant that I'm just starting, where
36:28
Speaker 1: he references how like a junior analyst sends an email
36:32
Speaker 1: to Dahio like screaming in him, essentially saying, we told
36:36
Speaker 1: you this was a really important presentation, and you muffed
36:39
Speaker 1: it and you came in unprepared and you were unfocused.
36:42
Speaker 1: Then that's the culture, and it makes them it's not
36:46
Speaker 1: a coincidence that they've become the biggest hedge fund in
36:49
Speaker 1: the world. It would be very hard to execute, but
36:52
Speaker 1: it's a powerful idea. Yeah, very hard to execute. So
36:56
Speaker 1: so let's talk about some other things that are a
36:57
Speaker 1: little hard to execute or easy to execute. What one
37:01
Speaker 1: of the columns of yours that I really liked, just
37:05
Speaker 1: want to buy the new Jersey Turnpike privatization and it's
37:09
Speaker 1: discontent And I don't know if that's your subhead or mine,
37:14
Speaker 1: but I just remember that column being fascinated. And you
37:17
Speaker 1: see this for cash strapped states, municipalities around the country
37:22
Speaker 1: selling these really impossible to replace things to the private sector,
37:26
Speaker 1: and these are disasters, aren't they. Well, we did it
37:29
Speaker 1: in Chicago, right, And the problem is if you really
37:32
Speaker 1: actually did take the money and invest it as a
37:36
Speaker 1: city and do what you were supposed to do with it,
37:38
Speaker 1: then maybe at least financially for the city, it wouldn't
37:41
Speaker 1: be such a problem. But all you're doing is getting
37:43
Speaker 1: rid of your long term assets in exchange for a
37:45
Speaker 1: quick cash infusion, right, And so it ends up being
37:49
Speaker 1: a complete disaster because then the assets are gone and
37:51
Speaker 1: the money's gone, and all it does is bridge a
37:53
Speaker 1: short term gap instead of funding anything for the future.
37:56
Speaker 1: And then there are a lot of questions about how
37:58
Speaker 1: well the private owners actually do. Horror stories with enforcements
38:03
Speaker 1: of traffic tickets and and parking tickets and raising rates
38:07
Speaker 1: and everything. Real real horror stories about about how it works. Um.
38:13
Speaker 1: And there was quite a push a few years ago
38:14
Speaker 1: for the banks to get more into this business, and
38:17
Speaker 1: everybody was talking about setting up an infrastructure fund. So
38:20
Speaker 1: it'll be interesting to see how it pans out. If
38:21
Speaker 1: we've got another economic downturn, it won't do well. The
38:26
Speaker 1: other title I really liked squid Love, Why Aren't Clients
38:31
Speaker 1: Fleeing Goldman Sacks. It's a great title, but the point
38:35
Speaker 1: it raises, why didn't clients fleet Goldman Sacks? Well, you
38:39
Speaker 1: could have two different interpretations. One could be that clients
38:43
Speaker 1: didn't care even though the rest of us did. When
38:45
Speaker 1: you say didn't care, didn't care about them taking the
38:48
Speaker 1: other side of the trades, didn't care about how Goldman
38:51
Speaker 1: behaved in the financial crisis. When I think by any characterization,
38:55
Speaker 1: they looked out for their own interest and didn't look
38:57
Speaker 1: out for their client interests. That a given is and
39:00
Speaker 1: everyone assume, hey, that's what they're doing. I know who
39:02
Speaker 1: I'm in bed with. Well, look in Goldman and Goldman's defense,
39:05
Speaker 1: they say that's the trading business, and the clients knew
39:07
Speaker 1: what they were doing. But Goldman has always said is
39:10
Speaker 1: one of its ten principles. I think the number one
39:12
Speaker 1: principle is our client's interests come first. They don't say
39:14
Speaker 1: our client's interests come first in our investment banking business.
39:17
Speaker 1: They come way down the list in every other business.
39:20
Speaker 1: And so it's hypocrisy, right, I think they mean their
39:22
Speaker 1: client's interest in principal payment. Until we get those payments,
39:26
Speaker 1: we just can't even chut it. That's really funny. But
39:29
Speaker 1: but but Goldman has done fine in the years since
39:32
Speaker 1: the cis there still at the time, still at the
39:34
Speaker 1: top of the M and A leagues, they haven't lost
39:36
Speaker 1: client business at all. And I think if my there's
39:39
Speaker 1: no way to know what the answer to that is,
39:40
Speaker 1: my guests would be that clients still want what they
39:43
Speaker 1: perceive as the best advice. They still think Goldman is
39:46
Speaker 1: the best, and they're willing to take the whatever risks
39:49
Speaker 1: come with that. I think the other part of it
39:51
Speaker 1: is that it's not like any investment bank came out
39:53
Speaker 1: of the crisis well, right, So it's not like you
39:56
Speaker 1: have the super Goldman who did perfectly and behave beautifully
39:59
Speaker 1: during the crisis. Don't everybody you have Wells Fargo as
40:02
Speaker 1: as a survivor did really well, and you had JP Morgan,
40:05
Speaker 1: but not among the top investment banks. So Morgan, Stanley, Maryland,
40:10
Speaker 1: I mean far worse behavior, right, can you go down
40:14
Speaker 1: that hole? List Ubs and Credit Swiss Following shortly after
40:18
Speaker 1: the crisis, the Buffett quote that when the Todd goes out,
40:21
Speaker 1: you see who swimming naked. Suddenly a lot of warts
40:24
Speaker 1: that were not seen previously to the crisis, we're all revealed.
40:28
Speaker 1: And you have to think no one would have noticed
40:30
Speaker 1: but for the crisis. Right. So if a client were
40:33
Speaker 1: going to leave Goldman SAX after the crisis, they would
40:35
Speaker 1: have had to go somewhere else. Where is that somewhere else?
40:37
Speaker 1: Deutsche Bank, Royal Bank of Scotland, they do great work.
40:42
Speaker 1: It's it's well so. In other words, there there are
40:45
Speaker 1: no options. And as long as you're dealing with the sharpie,
40:48
Speaker 1: they might as well be your sharp right. And you
40:50
Speaker 1: do have um a bunch of independent investment banks, boutique
40:53
Speaker 1: investment banks that have been set up, particularly in recent years,
40:56
Speaker 1: some of them populated by ex Golmen bankers. It will
40:58
Speaker 1: be interesting to see how that plays out, but there is,
41:01
Speaker 1: you know, there is some truth to the idea that
41:04
Speaker 1: a global client base they want financing when they come
41:07
Speaker 1: to you for adeal. They want the whole package that
41:09
Speaker 1: a big bank like Goldman can offer. They don't want
41:11
Speaker 1: a boutique and you can't get that with a potique.
41:13
Speaker 1: I've also noticed that there have been a number of
41:15
Speaker 1: companies seeded, but it's it's like when there's a super
41:18
Speaker 1: over in a star, all that star dust eventually becomes
41:21
Speaker 1: another star. When AI g blew up, there's a whole
41:24
Speaker 1: bunch of other little companies, including I think it's called
41:27
Speaker 1: Pure Coincidentally, an insurance company that's trying to compete with
41:32
Speaker 1: chub on the high end for residential real estate insurance
41:36
Speaker 1: x A I G. Guy so following, and I think
41:38
Speaker 1: that began long before the crisis. But it's fascinating how
41:42
Speaker 1: every time there's a disaster, you have good people, you
41:45
Speaker 1: have less than good people when some of the good
41:46
Speaker 1: people ultimately end up. There've been a couple of stories
41:49
Speaker 1: that have been interesting, one tracking former Drexel people, another
41:52
Speaker 1: tracking former end Round people, a lot of whom have
41:55
Speaker 1: gone on to do really interesting things. I mean circling
41:58
Speaker 1: back to end Round to me that the that company
42:00
Speaker 1: is just such a tragedy. There are a lot of
42:01
Speaker 1: good ideas and a lot of brilliant people. They just
42:04
Speaker 1: couldn't wait for the ideas to actually produce revenue, so
42:07
Speaker 1: they accelerated the revenue through ways both legitimate but sketchy
42:10
Speaker 1: and totally illegitimate. And that's why I understanding you correctly.
42:14
Speaker 1: You're saying there were a lot of really good ideas.
42:16
Speaker 1: It's just a shame it was all a fraud. Is
42:20
Speaker 1: that what you're actually saying. I'm sort of saying that
42:22
Speaker 1: except Ron, you know, it was a fraud and very
42:24
Speaker 1: it was a legal fraud. A lot of what they
42:26
Speaker 1: did technically met the letter of the law. It was legal,
42:29
Speaker 1: so it's still a very complicated scam. But but yes,
42:32
Speaker 1: there were the ideas were good. It's just that they
42:35
Speaker 1: couldn't wait to show revenue and profits that they came
42:38
Speaker 1: up with scammy ways to make it look like they
42:40
Speaker 1: were producing more profits than they were. But the ideas
42:43
Speaker 1: and the people who were there, there are a lot
42:45
Speaker 1: of good people. I'm fond of saying one of the
42:47
Speaker 1: biggest problems in finance is that no one's willing to
42:50
Speaker 1: wait to get rich slowly. And it's really Oh, I
42:53
Speaker 1: love that life. Every time people run into trouble, I've
42:58
Speaker 1: I've met and worked with and been on the other
43:00
Speaker 1: sides of discussions with people who are just incredibly talented salespeople,
43:06
Speaker 1: and invariably some of these guys end up getting into trouble.
43:10
Speaker 1: And it's almost always guys, and it's the question is
43:14
Speaker 1: always all you have to do is put your head
43:16
Speaker 1: down and be a reasonable human and not do really stupid,
43:23
Speaker 1: ethically dubious, legally questionable things, and eventually you become very wealthy.
43:29
Speaker 1: What what is so challenging about that? I don't know.
43:31
Speaker 1: I've been thinking a lot lately about the difference between
43:34
Speaker 1: being smart and why being wise. And I think there's
43:36
Speaker 1: a lot of smarts out there, but there's not a
43:38
Speaker 1: lot of wisdom. So how many how much time do
43:41
Speaker 1: we have left? So in the last few minutes we
43:44
Speaker 1: have let me get to some of my favorite questions
43:47
Speaker 1: that I asked for of all my guests. UM, and
43:50
Speaker 1: I have I have us with Oh, you're right about
43:53
Speaker 1: the time. UM, So let's talk a little bit about mentors.
43:56
Speaker 1: Any mentors stand out in your mind? I think i'd
43:59
Speaker 1: have to say Joe No, Sarah is the the is
44:02
Speaker 1: probably and John Huey too, who ran Fortune magazine when
44:05
Speaker 1: I got there. I still remember John Pulling calling a
44:08
Speaker 1: big meeting of Fortune right when I started and basically saying,
44:11
Speaker 1: if you don't know what you're doing, there's no place
44:13
Speaker 1: for you here at this magazine. And I was like,
44:15
Speaker 1: I don't have a clue. I'm not gonna last long here,
44:17
Speaker 1: and this this is my my new job. But Joe
44:20
Speaker 1: too has always been really good both on the big
44:23
Speaker 1: picture He's the one who encouraged me to write the
44:25
Speaker 1: un Run book, but also really good at sorting through
44:28
Speaker 1: ideas because I have a lot of ideas and I
44:30
Speaker 1: need someone to say this one sucks. Go for this one.
44:32
Speaker 1: So let's talk about books. Since you mentioned what are
44:34
Speaker 1: some of your favorite books, fiction or nonfiction? Let's see. Um. Okay,
44:40
Speaker 1: so I'm a total sucker for The Lord of the Rings. Okay,
44:43
Speaker 1: I think it's one of the one of the best,
44:47
Speaker 1: and thinking about it again and I actually am Now
44:49
Speaker 1: I have enough distance between the movies and I'm willing
44:51
Speaker 1: to watch the first three movies again. The Hobbit. Hobbit
44:57
Speaker 1: not as not as great as the first three. Lord
44:59
Speaker 1: of the Ring now, no, no, no, But the Lord
45:01
Speaker 1: of the Rings is absolutely amazing. Game of Thrones is awesome.
45:05
Speaker 1: I haven't been able to watch the TV show because
45:07
Speaker 1: I found I found the book so stressful. Um on
45:11
Speaker 1: a on a more series friend, Um Middle March obviously amazing.
45:15
Speaker 1: I love biographies. There's a great biography of Collette that
45:19
Speaker 1: really made me think about called Secrets of the Fresh
45:21
Speaker 1: of the Flesh, that really made me think differently about
45:24
Speaker 1: how biographies can be done. But I think life stories.
45:28
Speaker 1: Secrets of the Flesh, yes, but I think I think
45:30
Speaker 1: stories about fascinating people that explore the nuances of their lives,
45:35
Speaker 1: particularly fascinating, controversial people are are just great. And then
45:39
Speaker 1: I loved UM recently All the Light We Cannot See.
45:42
Speaker 1: I think that's one of the most beautiful books, although
45:45
Speaker 1: deeply sad, books, that I've read in a long time.
45:48
Speaker 1: I gave one of the people in my office The
45:50
Speaker 1: Right Brothers book for the holidays, and he raved about
45:55
Speaker 1: So now I have to everything. All rights is great,
45:58
Speaker 1: but now I have to I gave it as a gift.
46:00
Speaker 1: Now I actually have to wait. Now you have to
46:02
Speaker 1: go read it. UM. So, millennials, you've been doing this
46:05
Speaker 1: for a couple of years. If a millennial comes to
46:07
Speaker 1: you and says, hey, I want to get into your field,
46:10
Speaker 1: what sort of advice would you give, either a recent
46:12
Speaker 1: college graduate or a millennial. Seriously, now what what I
46:17
Speaker 1: What I actually say is that you have to be
46:19
Speaker 1: really committed to this, and you can't expect it to
46:22
Speaker 1: be something where there's a set career path, and there
46:24
Speaker 1: never really has been. Right, You've found your way into
46:26
Speaker 1: showing this in a totally different way I did. Some
46:29
Speaker 1: people go to journalism school and train to be journalists
46:31
Speaker 1: all their life, so it always has been a flexible
46:34
Speaker 1: career path, but now so that more than ever right,
46:36
Speaker 1: we don't know where our industry is going. It's not
46:38
Speaker 1: like there's while you start on the bottom run here
46:40
Speaker 1: and then you get a job here. It's it's all
46:42
Speaker 1: made up, All bets are off. So I think you
46:45
Speaker 1: have to have a real passion to want to tell
46:47
Speaker 1: stories and learn things and be curious and and not
46:51
Speaker 1: to and to be willing to work hard, to say
46:54
Speaker 1: the least. And our final question that I ask everybody,
46:58
Speaker 1: what is it that you wish you knew about investing companies, journalism?
47:04
Speaker 1: What is it that you wish you knew twenty years
47:06
Speaker 1: ago that you know today? I think I had wish
47:11
Speaker 1: I had known. I think I wish I had known
47:13
Speaker 1: how to be more skeptical. And I still sometimes think
47:16
Speaker 1: I should be more skeptical even than I am. Not
47:19
Speaker 1: only do people not always tell the truth, but sometimes
47:22
Speaker 1: people don't even know that they're not telling the truth.
47:24
Speaker 1: And so I wish I knew to listen more and
47:28
Speaker 1: really challenge things that don't appear to that don't make sense.
47:32
Speaker 1: And you know what, sometimes you're an idiot because you
47:34
Speaker 1: just missed something somebody said and you didn't understand and
47:37
Speaker 1: you actually didn't get it. But sometimes if you're really
47:39
Speaker 1: willing to say that doesn't make sense to me, can
47:42
Speaker 1: you repeat that you'll really learn something? And I wish
47:46
Speaker 1: I were better at that than I am. That's quite fascinating.
47:50
Speaker 1: For those of you who have enjoyed this conversation, be
47:53
Speaker 1: sure and check out Bethany's various books. You can look
47:56
Speaker 1: Up an Inch or Down an Inch on Apple iTunes
47:59
Speaker 1: and see the other eighty or so conversations we've had.
48:03
Speaker 1: H be sure and check out my daily column. I
48:06
Speaker 1: already said that, so I don't need to say that again. UM.
48:09
Speaker 1: I want to thank Mike bat Nick, my head of research,
48:11
Speaker 1: for helping me um do the deep dive into this,
48:15
Speaker 1: as well as Charlie Vollmer, who is about to kick
48:18
Speaker 1: me out of the studio. I'm Barry Ridholts. You're listening
48:21
Speaker 1: to Masters in Business on Bloomberg Radio.