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Gretchen Morgenson: From Wall Street to Journalism · Masters in Business

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  Speaker 1: This is Master's in Business with Barry Ridholds on Bloomberg Radio.
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  Speaker 1: This week on the podcast, I have an extra special guest.
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  Speaker 1: Gretchen Morgensen is the Pulitzer Prize winning investigative journalist for
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  Speaker 1: The Wall Street Journal and The New York Times. She
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  Speaker 1: currently works at NBC News as an investigative reporter. She
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  Speaker 1: has worked at Money Magazine, Forbes, worth all over the place.
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  Speaker 1: Her last book was a bestseller, Reckless Endangerment is all
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  Speaker 1: about the mortgage crisis. The current book is called These
• 0:38
  Speaker 1: Are the Plunderers. How private Equity runs and recks America.
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  Speaker 1: That's a little bit of a sensationalistic headline. When we spoke,
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  Speaker 1: the focus and conversation is really emphasizes the largest of
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  Speaker 1: the large private equity firms. Yes, there's a legitimate need
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  Speaker 1: and use for private equities, especially in mid markets where,
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  Speaker 1: to be blunt, Wall Street has just abandoned that space
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  Speaker 1: and gone up market, creating a vacuum. But we talk
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  Speaker 1: about some really fascinating things. Thirty percent of operating rooms
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  Speaker 1: are managed and run by doctors employed by private equity.
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  Speaker 1: That's a shocking number. We looked at everything from retail
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  Speaker 1: to nursing, homes, to hospitals, to insurance companies to manufacturers. Really,
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  Speaker 1: private equity used to be a small, outperforming sector of alternatives.
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  Speaker 1: It's now become giant, dominated by four firms, and no
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  Speaker 1: longer generating outsize returns. It's really a kind of fascinating
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  Speaker 1: aspect of this. As it's become more and more mainstream,
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  Speaker 1: it appears some of the performance advantages may have gone away. Anyway,
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  Speaker 1: Gretchen is a legend on Wall Street. She's won Lobe
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  Speaker 1: Awards and just about every other journalistic award there is.
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  Speaker 1: So when she dives into a space, really she does
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  Speaker 1: not any stone on turn. I found this to be
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  Speaker 1: really interesting conversation, and I think you will also, so,
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  Speaker 1: with no further ado, my conversation with NBC's Gretchen Morgansen.
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  Speaker 1: So let's talk a little bit about your kind of
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  Speaker 1: interesting career. You start as an assistant editor at Vogue
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  Speaker 1: magazine in the late seventies. How do you go from
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  Speaker 1: that to being a financial columnist?
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  Speaker 2: Okay, well, first of all, assistant editor is a little strong.
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  Speaker 2: I was a secretary, and I got the job because
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  Speaker 2: I could type more than thirty five words a minute. Okay,
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  Speaker 2: So I was just out of college, brand new to
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  Speaker 2: New York. I had graduated from a small liberal arts
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  Speaker 2: college in the Midwest, and my eyes were as big
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  Speaker 2: as saucers as I came into New York. It was
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  Speaker 2: the only job I could get. I wanted to be
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  Speaker 2: a journalist. This was back in the Watergate days, and
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  Speaker 2: you know, it was kind of exciting to think about
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  Speaker 2: possibly being a reporter. So that's my idea. Of course,
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  Speaker 2: the silence from my job applications to the New York Times,
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  Speaker 2: to Daily News, you name it was it was the
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  Speaker 2: silence was deafening. So Vogue was it?
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  Speaker 1: So you didn't stay a secretary of Vogue for very
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  Speaker 1: long though.
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  Speaker 2: Well, I sort of worked my way up, if you
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  Speaker 2: can call it that, to writing their personal finance column,
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  Speaker 2: which nobody read, by the way, at Vogue.
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  Speaker 1: At Vogue, why they just wanted to have a little Hey,
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  Speaker 1: let's speak to women in our magazine.
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  Speaker 2: Yes, so I think they sold it against an ad page,
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  Speaker 2: to be honest with you. But anyway, so it was
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  Speaker 2: very you know, basic instruction, and I really enjoyed doing that.
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  Speaker 2: And so I interviewed people, met a lot of folks,
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  Speaker 2: and then I was making very ten thousand dollars a year.
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  Speaker 1: That's big money in the seven No really, not really,
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  Speaker 1: that wasn't even big money in the fifties years. Yeah,
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  Speaker 1: thing is that? Is that what led you to your
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  Speaker 1: interest in Wall Street?
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  Speaker 2: Yes, so I said to myself, I don't have a
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  Speaker 2: rich dad, I don't have a rich husband. I'm going
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  Speaker 2: to have to make it on my own, and so
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  Speaker 2: what can I do? At about that time, Wall Street
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  Speaker 2: was battling a sex discrimination case with the EEOC. They
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  Speaker 2: had not hired enough women on the street this is
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  Speaker 2: the early eighties.
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  Speaker 1: Returned, Oh, thank goodness that got resolved. Yeah, now that
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  Speaker 1: we have gender parody.
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  Speaker 2: Well not quite, but it's better than it was anyways,
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  Speaker 2: definitely better. So they had to hire they had to
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  Speaker 2: start hiring women because they lost that case. And so
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  Speaker 2: I applied to the big brokerage firms as a salesman
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  Speaker 2: Dean Witter, Merrill Lynch Prudential Base at the time, and
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  Speaker 2: I got a job at Dean Witter. And the reason
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  Speaker 2: I got the job was because I killed it on
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  Speaker 2: the phone test.
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  Speaker 1: Really, well, you had been doing some journalism beforehand, so
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  Speaker 1: you're not afraid to ask people questions, right, So this
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  Speaker 1: is in the eighties and the beginning of the huge
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  Speaker 1: bull market, not that anyone knew in eighty two that
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  Speaker 1: strap yourself in the next eighteen years are going to
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  Speaker 1: be a rocket ship.
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  Speaker 2: Wait wait, wait. When I sat down in my chair
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  Speaker 2: at Dean Witter Reynolds, the Dow Jones Industrial average was
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  Speaker 2: at seven hundred and eighty one.
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  Speaker 1: Still under a thousand. That's unbelievable.
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  Speaker 2: So by the way, it made it hard to sell
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  Speaker 2: stocks because people were still in the looking backward phase.
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  Speaker 2: They weren't looking forward. But August nineteen eighty two, you're
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  Speaker 2: too young to remember that.
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  Speaker 1: Oh no, I have a vivid recollection.
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  Speaker 2: Was when the turn came and it was sort of like, okay,
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  Speaker 2: stocks are way too cheap. This is where you want to.
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  Speaker 1: Be seven pe back then, right seven.
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  Speaker 2: Pe on the SMP, and it was, you know, that
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  Speaker 2: was the turning point. So I was really well positioned
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  Speaker 2: for that move.
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  Speaker 1: And you stayed at Dean Water for what three four years?
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  Speaker 1: How long were you there?
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  Speaker 2: I stayed three years. I lived through the bear market
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  Speaker 2: that you don't remember of nineteen eighty three in tech
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  Speaker 2: stocks when there were this sort of you know, initial
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  Speaker 2: phase of personal computters and computing was becoming big, and
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  Speaker 2: they just got way ahead of themselves.
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  Speaker 1: Even calling them tech stocks back then, what was the phrase, you.
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  Speaker 2: Know, I don't know. I think it was text stocks.
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  Speaker 2: I mean, anyway, so.
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  Speaker 1: I don't recall that bear market.
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  Speaker 2: Yes, it was bad, it was vicious. It was over
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  Speaker 2: the summer of nineteen eighty three, and so I learned
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  Speaker 2: the hard way what happens when the stocks that you
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  Speaker 2: recommended to people because your firm was saying they would
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  Speaker 2: be goodbyes go down and those people lose money.
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  Speaker 1: And I felt bad. It was just not in the
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  Speaker 1: next six months.
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  Speaker 2: That's you know, they were ahead of themselves. You know,
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  Speaker 2: the euphoria, the momentum was getting too.
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  Speaker 1: Was there euphoria in eighty three?
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  Speaker 2: Yeah? Sure, no kidding, Oh yeah, Eagle Computer. I mean,
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  Speaker 2: some of these things were high flyers. And so when
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  Speaker 2: you had customers calling you up and saying, oh my gosh,
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  Speaker 2: what happened to all my money? It was such a
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  Speaker 2: huge trauma for me. I really felt bad, and I
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  Speaker 2: sort of felt like, if you have too much of
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  Speaker 2: a capacity for guilt, maybe not the right business.
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  Speaker 1: So is that what set you back into journalists?
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  Speaker 2: That's what sent me back. However, I did have it
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  Speaker 2: are I was now armed with a lot of information
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  Speaker 2: about how the world works on Wall Street.
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  Speaker 1: So that's exactly where I was going to go next.
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  Speaker 1: You have a knack for finding some of Wall Street's
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  Speaker 1: shadier operations. You've done this your whole career. How important
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  Speaker 1: was working as a broker to giving you insight of, Hey,
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  Speaker 1: here's how this stuff really works.
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  Speaker 2: Very important, very I mean you really saw the inner workings.
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  Speaker 2: You know, how the sausage is made, as they say,
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  Speaker 2: And so I would see how the over the counter desk,
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  Speaker 2: over the counterstock desk would push stocks and you know,
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  Speaker 2: encourage brokers to sell them, put a lot of commission
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  Speaker 2: in them to move them because some big seller was
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  Speaker 2: coming into the market. And you know, it just struck me.
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  Speaker 2: There were a couple of things about it that I
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  Speaker 2: just kept seeing how it really was. The customer was
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  Speaker 2: not being put first, and there were, of course the
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  Speaker 2: conflicted analysts that I then wrote about years later. I
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  Speaker 2: saw that firsthand and was, you know, my customers were
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  Speaker 2: harmed by that as well.
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  Speaker 1: So let's put a little sunshine. Let's put a little
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  Speaker 1: lipstick on this pig here it is. It's forty years later,
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  Speaker 1: the fiduciary side of the street, which was tiny in
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  Speaker 1: the eighties, is now not only large, but one of
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  Speaker 1: the fastest growing segments. While we're not even remotely close
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  Speaker 1: to gender parody, it's certainly better than it was.
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  Speaker 2: It's better than it was to spare. You don't have
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  Speaker 2: strippers coming in for people's birthday parties like I saw
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  Speaker 2: when I was a broker.
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  Speaker 1: Okay, unbelievable.
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  Speaker 2: Yeah, yeah, I saw it with my own eyes.
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  Speaker 1: I tell people who are the younger guys in the office,
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  Speaker 1: go watch boiler Room, go watch Wolf of Wall Street.
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  Speaker 1: They it's cinema verite. It just rings so and that
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  Speaker 1: world is gone. It's like the bad part. It's good
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  Speaker 1: that it's gone. But there were some good aspects of that,
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  Speaker 1: Like there were training programs. They taught people what's a stock,
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  Speaker 1: what's a bond. They used to do that at the
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  Speaker 1: bigger firms. Those are like tiny classes. Now, oh really,
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  Speaker 1: they don't do that anymore. Yeah, they do it, but
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  Speaker 1: just not what it was. So around the same time
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  Speaker 1: you transition from Wall Street to journalism, the LBL boom
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  Speaker 1: starts to take off. It becomes all the rage. What
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  Speaker 1: were you thinking at the time, Hey, I'm gonna write
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  Speaker 1: a book in forty years or were you thinking this
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  Speaker 1: is interesting or here comes problems? How did you see
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  Speaker 1: it back then?
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  Speaker 2: Back then? You know, it really just looked like a
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  Speaker 2: very reasonable response to a decade or so of undervalued stocks,
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  Speaker 2: right the nineteen seventies stocks were in the tank, you know,
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  Speaker 2: the death of equities, you remember to cover, and so
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  Speaker 2: it looked like it was really a pretty reasonable reaction
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  Speaker 2: to what had been years of undervalue in the stock market.
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  Speaker 2: So the initial phase of LBOs were not as not
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  Speaker 2: as pernicious as they are now because they were actually
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  Speaker 2: taking over companies that had value. You know, they're sitting
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  Speaker 2: there in the stock price that you could see, like
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  Speaker 2: you mentioned the seven price earnings ratio. Yeah, so it
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  Speaker 2: really was a little it was reasonable, It made sense.
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  Speaker 2: It was a natural kind of outcome of what had
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  Speaker 2: happened before.
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  Speaker 1: So we're going to talk a lot more about the book.
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  Speaker 1: These are the plunderers, but I have to mention the
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  Speaker 1: run of names that you really focus on in the book.
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  Speaker 1: These obviously aren't all of private equity. There's a whole
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  Speaker 1: lot hundreds of other companies, but Apollo, Blackstone, Carlisle and
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  Speaker 1: KKR really seems to be the key focus. Is it
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  Speaker 1: their size, their sector, the way they practice their business?
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  Speaker 1: What led you to those four?
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  Speaker 2: Well, it's their size first, Barry. I mean, these are
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  Speaker 2: the leaders of the pack. These are the folks that
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  Speaker 2: and the firms that set the tone, lead the way
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  Speaker 2: other people mimic them. I mean, KKR was behind the
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  Speaker 2: big Cahuna deal of the nineteen late nineteen eighties, r
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  Speaker 2: j R Nibisco. So this is a group of firms
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  Speaker 2: and people that really were there at the creation of
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  Speaker 2: what we now call private equity, and they do it
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  Speaker 2: in such size and in such scope that they have
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  Speaker 2: enormous impact. And that's why we're focusing on them. Yes,
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  Speaker 2: there are many, many private equity firms, but these really
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  Speaker 2: are the folks who set the tone.
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  Speaker 1: And you mentioned barbarians at the Gate in the book,
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  Speaker 1: which focused on the KKR takeover of RJR Nimbisco. That
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  Speaker 1: was sort of unfathomable at the time that someone could
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  Speaker 1: buy a giant publicly traded company strictly with low cost debt.
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  Speaker 1: Did that change the game going forward at that Once
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  Speaker 1: r J or Nabisco was in play, does that mean
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  Speaker 1: anybody is in play? How did that affect what took
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  Speaker 1: place over the next few decades.
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  Speaker 2: Yeah, and it also concerned Congress, as you remember, they
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  Speaker 2: had hearings about it. I mean, it was such a
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  Speaker 2: gargantuan deal at the time that it really made a
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  Speaker 2: lot of people nervous. And you know, there were studies
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  Speaker 2: done about what these deals would mean for workers, for pensions,
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  Speaker 2: and it really was sort of the beginning of questioning
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  Speaker 2: what the impact of these deals would be. But they
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  Speaker 2: just kept going, kept going, and there really was a
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  Speaker 2: sense during the late eighties, especially after the crash of
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  Speaker 2: nineteen eighty seven, that we really don't want to meddle
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  Speaker 2: with this. Let's just let the market take its course.
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  Speaker 2: In fact, I think Secretary of the Treasury at the
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  Speaker 2: time said the Mark it will, you know, work out
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  Speaker 2: these things and they will not become a problem.
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  Speaker 1: Yeah, the market always works these things out eventually, but
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  Speaker 1: that eventually can take longer right then expected. You mentioned
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  Speaker 1: they had a big impact, and they had a large
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  Speaker 1: effect that they also generated a lot of fees and
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  Speaker 1: a lot of moneies. What were the dollars like for
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  Speaker 1: these mega deals like r j AR Nibisco.
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  Speaker 2: Well, at the time, it sounded big but if you
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  Speaker 2: look back on it now, I don't know. I think
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  Speaker 2: there was there's a number we have in the book,
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  Speaker 2: maybe seventy million dollars or something in fees tokake care.
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  Speaker 2: I mean, that's like not even around the right, that's
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  Speaker 2: pocket chat, that's not that's walking around money.
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  Speaker 1: Right.
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  Speaker 2: So, you know, it's just gotten so so so much
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  Speaker 2: bigger erys as you know, the markets and the capitol
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  Speaker 2: pools have gotten so much bigger.
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  Speaker 1: Well we'll talk a little bit later about how as
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  Speaker 1: these companies got bigger, Wall Street got bigger, and it's
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  Speaker 1: kind of created a void underneath. But it's really really
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  Speaker 1: interesting to see where all this began at a time
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  Speaker 1: and when nobody really wanted a lot of these companies.
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  Speaker 1: They were some of these firms were, you know, all
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  Speaker 1: but left for debt. So you start the book with
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  Speaker 1: the line that kind of cracked me up. Let the
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  Speaker 1: looting begin. So let's start there. Where did this all begin?
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  Speaker 1: And when did it move from hey, we're going to
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  Speaker 1: help finance these companies that can't seem to get finance
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  Speaker 1: to full on piracy and looting.
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  Speaker 2: Well, there are a couple of things that happen early
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  Speaker 2: on that sort of you see the beginnings of that.
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  Speaker 2: These are that these takeovers are not only designed to
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  Speaker 2: find companies that are maybe undervalued or underperforming, we can
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  Speaker 2: whip them into shape and then sell them later. That
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  Speaker 2: while they're doing that, while they're monitoring them, while they
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  Speaker 2: are looking at them, streamlining them, you know, improving their operations,
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  Speaker 2: there are a lot of fees to be extracted from
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  Speaker 2: these companies. So for starters, private equity firms will often
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  Speaker 2: put people on the company's board, and sometimes those board
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  Speaker 2: memberships will deliver earnings to those board members. Okay, you
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  Speaker 2: also had this thing called monitoring fees, where a company
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  Speaker 2: that was purchased by a private equity fund or firm
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  Speaker 2: would have to pay the firm fees for its monitoring,
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  Speaker 2: for its oversight, for its management expertise that it was
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  Speaker 2: providing to the company. Now, that makes sense because you know,
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  Speaker 2: they took over the company. There's presumably plus they're presumably
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  Speaker 2: very good at managing, and they know what they're doing,
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  Speaker 2: and they have a goal of selling it, you know,
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  Speaker 2: at a profit later. However, the monitoring fees had this
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  Speaker 2: really kind of abusive element to them. They typically structured
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  Speaker 2: as ten year contracts, so the company would agree to
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  Speaker 2: pay over ten years a certain amount of monitoring fees
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  Speaker 2: every year to the private equity.
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  Speaker 1: Firm, regardless of profitability or.
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  Speaker 2: Oh yes, no, it was absolutely de rigor. They did
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  Speaker 2: it every year top line. So if the private equity
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  Speaker 2: firm sold the company after five years, the company still
• 16:27
  Speaker 2: had to pay, still had to cough up the remaining
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  Speaker 2: five year contractual obligation of paying those monitorings.
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  Speaker 1: Now, wouldn't that just whoever's a purchaser knows this is happening.
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  Speaker 1: Doesn't that just lower the cost the purchase price by
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  Speaker 1: that much? Maybe it's a liaity on the books, but.
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  Speaker 2: Still it goes to these people. It is money for nothing.
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  Speaker 1: It's good to be the case.
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  Speaker 2: They are not doing the monitoring, and yet they're being
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  Speaker 2: paid to do the monitoring.
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  Speaker 1: So there are other fees like that that just sort
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  Speaker 1: of away at the stability of a company.
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  Speaker 2: Well I think I'm trying to think, oh well, okay, Well,
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  Speaker 2: first of all, the big fee that really ends up
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  Speaker 2: and this is not a fee to the private equity firm.
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  Speaker 2: But the big problem with many of these deals is
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  Speaker 2: the debt interest costs. Okay, so when the private equity
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  Speaker 2: firm takes over a company, they pile on a lot
• 17:26
  Speaker 2: of debt on the company. It's expenses increase dramatically to
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  Speaker 2: pay those debt expenses, and oftentimes the companies will extract
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  Speaker 2: the firms, I mean, will extract money in the form
• 17:41
  Speaker 2: of what's called dividend recapitalizations. They will load the company
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  Speaker 2: with debt and then they'll take money out almost immediately,
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  Speaker 2: and that's just kind of a way of stripping the
• 17:57
  Speaker 2: company of well.
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  Speaker 1: In other words, when you say that they load the
• 18:01
  Speaker 1: company with debt, they're borrowing a lot of capital. So
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  Speaker 1: now the company is sitting with this cash with an
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  Speaker 1: offsetting liability, meaning the company that's been purchased and the
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  Speaker 1: pe owner slash manager will take fees out of that.
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  Speaker 2: Well, they take the dividend recapitalization, meaning that they take
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  Speaker 2: a portion of what debt they've raised in cash for
• 18:21
  Speaker 2: themselves as a payout to themselves.
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  Speaker 1: And who's lending this money to the company.
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  Speaker 2: The banks could be Wall Street, could be private debt folks, but.
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  Speaker 1: It's this is very often securitized and sold off into
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  Speaker 1: the market.
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  Speaker 2: It can be collateralized loan obligations. Now it's big private debt.
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  Speaker 2: But so you had these dividend recaps. In two thousand
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  Speaker 2: and seven, firms extracted the private equity firms extracted twenty
• 18:49
  Speaker 2: billion dollars from companies in the form of dividend recapitalizations,
• 18:54
  Speaker 2: and by twenty twenty one they were extracting seventy billion
• 18:59
  Speaker 2: in div and recapitalizations. Now that's money that a company
• 19:03
  Speaker 2: has to pay back, right the debt that was raised
• 19:07
  Speaker 2: to cover it.
• 19:07
  Speaker 1: And it's not going into what the company's doing.
• 19:10
  Speaker 2: And it's not going into the company's operations, and it
• 19:13
  Speaker 2: has an interest cost associated with it. So that's another
• 19:16
  Speaker 2: piece of the puzzle that I think is worth.
• 19:20
  Speaker 1: So we talked earlier about RJ or Nibisco. When you
• 19:24
  Speaker 1: look at the history of the eighties and even nineties
• 19:27
  Speaker 1: era LBOs, they seem to be a lot of lesser known,
• 19:32
  Speaker 1: not necessarily consumer facing companies, transport and logistics and manufacturing
• 19:39
  Speaker 1: like r JR is kind of one of the first
• 19:43
  Speaker 1: names that the average person would know. How did that
• 19:48
  Speaker 1: transition take place? What were most of the eighties era
• 19:52
  Speaker 1: LBOs focused on. These were really way under the radar
• 19:56
  Speaker 1: sort of things. It's only later, or at least in
• 19:58
  Speaker 1: the book you described that it's only later that it's
• 20:02
  Speaker 1: household brands and retailers and names we know. Explain that
• 20:07
  Speaker 1: a little bit if you would.
• 20:09
  Speaker 2: Well, I think what was going on again we talked
• 20:11
  Speaker 2: a little bit about this earlier, is that these were
• 20:13
  Speaker 2: the companies that were most undervalued. Remember, we were coming
• 20:16
  Speaker 2: out of a very bad recession, and so probably what
• 20:20
  Speaker 2: you had at that time, or you know, the industrial
• 20:23
  Speaker 2: companies were the ones that were harmed, you know, very
• 20:27
  Speaker 2: very much by the recession, and so their price earnings
• 20:30
  Speaker 2: ratios were probably below the S and P average of seven,
• 20:34
  Speaker 2: and so that might have been why they were taking
• 20:36
  Speaker 2: over and focusing more on them. But again, as this
• 20:39
  Speaker 2: practice and process sort of morphed into something else, it
• 20:44
  Speaker 2: became more about some of the big name companies that
• 20:48
  Speaker 2: you know. Now. A big pivotal moment was when the
• 20:51
  Speaker 2: junk bond market crashed in the early nineties. This was
• 20:56
  Speaker 2: after the SNL crisis. SNL's had been persued to buy
• 21:00
  Speaker 2: a lot of junk bonds. The market turned. Milkin and
• 21:06
  Speaker 2: Drexel Burnham collapsed and failed. So you had this huge
• 21:11
  Speaker 2: market maker and junk bonds disappear. Junk bond market went
• 21:15
  Speaker 2: really into the toilet, and that also then created a
• 21:20
  Speaker 2: lot of distress in the market for companies that had
• 21:24
  Speaker 2: borrowed from the junk bond market, and now you had
• 21:27
  Speaker 2: those companies trading at very low prices. So again it
• 21:31
  Speaker 2: was a distress situation that these companies took advantage of.
• 21:36
  Speaker 1: So how do you draw a distinction between LBO brands
• 21:40
  Speaker 1: of private equity, the thing that some people call vulture capitalism,
• 21:46
  Speaker 1: and credible mid market banking and merchant banking that is
• 21:51
  Speaker 1: really one of the few sources of capital for these
• 21:54
  Speaker 1: mid sized companies. Given that Wall Street started chasing all
• 21:59
  Speaker 1: the big.
• 22:00
  Speaker 2: Firms, Well, I think you know, there is a right
• 22:03
  Speaker 2: way and the wrong way to do this business, and
• 22:05
  Speaker 2: certainly there are many firms doing the right thing. As
• 22:09
  Speaker 2: far as what that might mean, Okay, less debt. Okay,
• 22:15
  Speaker 2: the debt that is levied onto these companies is can
• 22:18
  Speaker 2: be very damaging. And right now, Barry, we're going through
• 22:21
  Speaker 2: a period of rising interest rates and companies are experiencing
• 22:25
  Speaker 2: distress because much of this debt is floating, it's not fixed.
• 22:31
  Speaker 2: And so what you need to remember is that the
• 22:34
  Speaker 2: costs associated with borrowing money as a company when interest
• 22:39
  Speaker 2: rates are zero is a different story than when interest
• 22:42
  Speaker 2: rates are five so that is a huge part of
• 22:46
  Speaker 2: the puzzle. So how about putting a little more equity
• 22:48
  Speaker 2: into these deals instead of so much debt. How about
• 22:52
  Speaker 2: putting more of your own skin in the game kind
• 22:55
  Speaker 2: of a thing. And I think, you know, the massive
• 22:58
  Speaker 2: layoffs that often occur her are very detrimental. I think
• 23:02
  Speaker 2: that the asset stripping that has also occurred. Pensions, for instance,
• 23:07
  Speaker 2: are sold off. Overfunded pensions get sold off and that goes,
• 23:12
  Speaker 2: you know, into the private equity firm instead of into
• 23:15
  Speaker 2: the company itself. So I think you can avoid some
• 23:19
  Speaker 2: of these practices very easily. You don't maybe get the
• 23:23
  Speaker 2: returns that you do when you have all those pieces
• 23:27
  Speaker 2: of the puzzle in place. But I think right now
• 23:31
  Speaker 2: we have to think about this as is it a
• 23:34
  Speaker 2: sustainable business model that you fire a lot of workers,
• 23:38
  Speaker 2: that you strip pensions and health benefits, that you levy
• 23:43
  Speaker 2: the debt on these companies, and that you want to
• 23:47
  Speaker 2: sell them in five years, which is short termism you
• 23:50
  Speaker 2: know that we often sort of deplore in the stock market.
• 23:54
  Speaker 2: Is that is that really a business model that can
• 23:57
  Speaker 2: work for the long haul.
• 23:59
  Speaker 1: So when private equity really was ramping up in the
• 24:02
  Speaker 1: eighties and nineties. It was essentially an institutional allocation. This
• 24:08
  Speaker 1: wasn't a mom and pop investment. Today that's changed. It's
• 24:12
  Speaker 1: really attracting a lot of retail dollars. How is that
• 24:15
  Speaker 1: working out?
• 24:17
  Speaker 2: Well, you know, it's interesting. For years decades, as you say,
• 24:21
  Speaker 2: this was a investing strategy that was limited to sophisticated investors,
• 24:27
  Speaker 2: you know, high network individuals, people who could you know,
• 24:31
  Speaker 2: take it stand the fact that it's opaque, that it
• 24:34
  Speaker 2: has high fees, that it is you know, not quite
• 24:39
  Speaker 2: as investing in an S and P five hundred stock
• 24:42
  Speaker 2: fund and not that simple. But now it is encroaching
• 24:47
  Speaker 2: onto the mom and pop in four O one k's
• 24:50
  Speaker 2: the Labor Department under Donald Trump did open the door
• 24:55
  Speaker 2: for private equity to get into for a one case.
• 24:58
  Speaker 2: It had been prevented, had been barred from that before
• 25:01
  Speaker 2: because of this fiduciary duty idea and also because of
• 25:05
  Speaker 2: the opacity of these instruments. But so yes, you have
• 25:10
  Speaker 2: it starting to seep into what we might call the
• 25:13
  Speaker 2: high net worth retail market. You know, some of these
• 25:18
  Speaker 2: the Blackstone b reat is a perfect example of that.
• 25:22
  Speaker 2: That's a real estate investment trust that is a Blackstone entity,
• 25:30
  Speaker 2: and it has really done a lot to attract the
• 25:34
  Speaker 2: kind of high net worth retail customers into that. So,
• 25:39
  Speaker 2: you know, I think the private equity sees this as
• 25:42
  Speaker 2: an opportunity because they're not really growing the institutional aspect
• 25:49
  Speaker 2: of their business. Pension funds perhaps maybe aren't growing as
• 25:52
  Speaker 2: much as they need them to, and so this is
• 25:54
  Speaker 2: a ripe market for them.
• 25:56
  Speaker 1: Yeah, clearly four oh one K is now much estra
• 26:00
  Speaker 1: growing part of the allocation landscape then, either direct benefits
• 26:08
  Speaker 1: or pensions that that, if anything, that side of the
• 26:11
  Speaker 1: street is treating shrinking dramatically. Let's talk about some of
• 26:16
  Speaker 1: the new areas that private equity seems to be playing
• 26:21
  Speaker 1: in the book talks about emergency care and er rooms
• 26:26
  Speaker 1: that have been privatized. I always think of er and
• 26:32
  Speaker 1: those sort of emergency services as a service as a
• 26:37
  Speaker 1: community good, not a for profit model. Am I naive
• 26:41
  Speaker 1: and not realizing we could monetize emergencies or should this
• 26:46
  Speaker 1: be kept out of private asset allocators hands?
• 26:52
  Speaker 2: This is a really really crucial question for the whole
• 26:56
  Speaker 2: private equity industry. Now they have seized on healthcare as
• 27:00
  Speaker 2: a huge industry to really dive into to invest in
• 27:05
  Speaker 2: and you know why that is because it's seventeen percent
• 27:07
  Speaker 2: of gross domestic products. So it's a big, big pool, okay,
• 27:13
  Speaker 2: of potential money. So you have private equity rolling up
• 27:16
  Speaker 2: doctors practices, you have private equity going into dermatology practices,
• 27:21
  Speaker 2: imaging MRI Mriyes, anesthesiology is another big one, and yes,
• 27:28
  Speaker 2: emergency departments. Emergency departments is another. And the difficulty with
• 27:34
  Speaker 2: healthcare is that you are not supposed to put profits
• 27:39
  Speaker 2: ahead of patients.
• 27:40
  Speaker 1: So let's talk about hospitals. I don't understand how all
• 27:43
  Speaker 1: these not for profit hospitals get purchased and rolled up
• 27:48
  Speaker 1: into a chain of not for profit hospitals that are
• 27:51
  Speaker 1: managed for profitability. That seems to be, you know, counterintuitive.
• 27:57
  Speaker 1: Tell us a little bit about what's.
• 27:59
  Speaker 2: Going on now we're really talking about, Perry, is the
• 28:03
  Speaker 2: staffing companies that staff the hospitals. Okay, So private equity
• 28:08
  Speaker 2: is not buying the emergency departments. What private equity is
• 28:12
  Speaker 2: doing is operating the emergency departments.
• 28:15
  Speaker 1: Similar hotels operate for the hospital.
• 28:18
  Speaker 2: Okay. And it's like any staffing company. You know, you're
• 28:22
  Speaker 2: a big whatever, you hire a staff and company to
• 28:24
  Speaker 2: help you find people. Okay, So there are two major
• 28:28
  Speaker 2: players in emergency departments. One is Team Health and the
• 28:32
  Speaker 2: other is in Vision. Envision is owned by KKR and
• 28:35
  Speaker 2: Team Health is Blackstone, and they control and other smaller
• 28:40
  Speaker 2: private equity firms control forty percent of the nation's emergency departments.
• 28:46
  Speaker 2: Now you don't know this. When you go to the
• 28:49
  Speaker 2: emergency department, the hospital hires them. Of course, they say
• 28:54
  Speaker 2: to the hospital, we're going to improve your profitability. We're
• 28:57
  Speaker 2: going to help you, you know, make more money. We're
• 29:00
  Speaker 2: gonna you know, they'll say, improve patient care. But the
• 29:04
  Speaker 2: doctors that I have spoken to in emergency medicine say
• 29:08
  Speaker 2: that's absolutely not the case. That when the private equity
• 29:11
  Speaker 2: firms come in, they tell them how to do their business,
• 29:14
  Speaker 2: They tell them how to code for patient billings.
• 29:18
  Speaker 1: Well, they're medical experts, aren't they private equity. Don't they
• 29:21
  Speaker 1: have a specialty in emergency care?
• 29:24
  Speaker 2: I know, I think they have.
• 29:25
  Speaker 1: They have a special so they're financers.
• 29:27
  Speaker 2: I'm sorry, Yes, they have a specialty financing.
• 29:30
  Speaker 1: But and you know, this is a horrife. I have
• 29:33
  Speaker 1: to tell you. I don't have problem with private equity
• 29:35
  Speaker 1: pushing into real estate and other areas, but emergency rooms
• 29:40
  Speaker 1: seems if.
• 29:41
  Speaker 2: You're talking about you know, the coffee and donut, you know,
• 29:44
  Speaker 2: the private equity owns. Okay, if you don't like the
• 29:47
  Speaker 2: coffee and the donut, you'll go somewhere else. But if
• 29:50
  Speaker 2: you're in need of an emergency department and this is
• 29:53
  Speaker 2: the only one in your town and you have to
• 29:55
  Speaker 2: go there and it's run by a private equity firm
• 29:59
  Speaker 2: that is putting profits ahead of patients, that's a problem.
• 30:03
  Speaker 1: And this has become very big, not necessarily in big cities,
• 30:08
  Speaker 1: but in the South, in rural areas, in places that
• 30:12
  Speaker 1: have very limited healthcare options and a shortage of doctors.
• 30:17
  Speaker 1: It's not like there's the option of saying, oh, I
• 30:20
  Speaker 1: don't like Southwestern General, I'm going to go to Northeastern
• 30:24
  Speaker 1: General and that's a better emergency room. This is usually
• 30:28
  Speaker 1: one of the only games in town.
• 30:30
  Speaker 2: Is absolutely. Absolutely rural hospitals have really been hit by
• 30:34
  Speaker 2: this practice. The other thing very is that they don't
• 30:37
  Speaker 2: put the name on the door now over the emergency department.
• 30:40
  Speaker 2: They don't say Team Health is here, or they don't
• 30:43
  Speaker 2: say Envision or KKR or Blackstone is running this, And
• 30:47
  Speaker 2: so try to find out if your emergency department is
• 30:50
  Speaker 2: run by one of these companies. It's very difficult to
• 30:53
  Speaker 2: do so again, it's opaque. Again, the consumer does not
• 30:59
  Speaker 2: know that this is happening. And so much of what
• 31:02
  Speaker 2: private equity has taken over is kind of like this
• 31:05
  Speaker 2: a stealth takeover because they don't put their names on
• 31:08
  Speaker 2: the door.
• 31:08
  Speaker 1: So let's talk about senior living. Since when are old
• 31:12
  Speaker 1: folks homes? A profit center? Tell us about that?
• 31:16
  Speaker 2: This is perhaps the biggest crisis I think, and it
• 31:21
  Speaker 2: really became very evident in a twenty twenty one study
• 31:27
  Speaker 2: by academics I think University of Chicago, you pen NYU
• 31:32
  Speaker 2: that studied long term mortality at nursing homes that were
• 31:37
  Speaker 2: owned by private equity and compared that with nursing homes.
• 31:40
  Speaker 1: There's so much more efficient. Their mortality rates have to
• 31:43
  Speaker 1: be much better, right.
• 31:45
  Speaker 2: There's so much more efficient because maybe they hire fewer
• 31:48
  Speaker 2: people to take care of the residents, that the mortality
• 31:51
  Speaker 2: rate is higher, the mortality a little higher. Ten percent.
• 31:55
  Speaker 1: Really, that's a big number.
• 31:57
  Speaker 2: Ten percent. And so these academics found that there were
• 32:01
  Speaker 2: twenty thousand lives that they said were lost because at
• 32:08
  Speaker 2: private equity owned nursing homes, nursing facilities, and so you
• 32:13
  Speaker 2: have the situation the academic said, where the focus, the
• 32:18
  Speaker 2: extreme focus on cost cutting meant lower staffs meant you know,
• 32:22
  Speaker 2: lesser care essentially translated to lesser care. And this was
• 32:27
  Speaker 2: just a striking, striking study of the difference between and
• 32:31
  Speaker 2: they were comparing it to other for profit nursing homes.
• 32:35
  Speaker 2: So this was not just for profit versus nonprofit. This
• 32:40
  Speaker 2: was private equity for profit and nonprofit.
• 32:43
  Speaker 1: How did private equity healthcare, senior living nursing homes eers
• 32:48
  Speaker 1: hospitals do during the COVID pandemic.
• 32:51
  Speaker 2: Well, they did very well because they got a lot
• 32:53
  Speaker 2: of cares Act money from the government.
• 32:56
  Speaker 1: I mean, how did the care itself, how did they
• 33:01
  Speaker 1: perform during the pandemic?
• 33:04
  Speaker 2: Well, as you know, healthcare was a disaster, and partly
• 33:11
  Speaker 2: because we were so unprepared for the pandemic. And I
• 33:15
  Speaker 2: would argue Barry that one of the reasons we were
• 33:18
  Speaker 2: so unprepared was because healthcare had been a focus of
• 33:23
  Speaker 2: private equity since really the mid two thousands. Okay, so
• 33:28
  Speaker 2: HCA perfect example, that's a company that went private in
• 33:33
  Speaker 2: an LBO. And so what you had is these firms,
• 33:38
  Speaker 2: again focusing on cost cutting, and so they were not
• 33:41
  Speaker 2: likely to you know, stockpile ppe masks to buy ventilators
• 33:49
  Speaker 2: to prepare for a pandemic, and inform.
• 33:52
  Speaker 1: That's the full cost money.
• 33:54
  Speaker 2: That costs money, and it's money that sits on a shelf.
• 33:57
  Speaker 2: And these guys don't like money sitting on a shelf.
• 34:00
  Speaker 2: And so you know, you have this. You actually had
• 34:03
  Speaker 2: a study in Congress that had, you know, what might
• 34:07
  Speaker 2: happen if we were to experience a pandemic, and it's
• 34:10
  Speaker 2: this is back in two thousand and five or six,
• 34:13
  Speaker 2: and it said we need to stockpile more than you
• 34:16
  Speaker 2: know when.
• 34:17
  Speaker 1: You had the Gate study in what twenty fifteen saying
• 34:19
  Speaker 1: the same thing, just in time. Inventory doesn't work during
• 34:22
  Speaker 1: a pandemic. You can't get things. It turned out to
• 34:25
  Speaker 1: be very accurate, right.
• 34:26
  Speaker 2: And so, but all those years leading up to twenty twenty,
• 34:29
  Speaker 2: when the whole you know, world collapsed in March, all
• 34:32
  Speaker 2: those years leading up to it, we had kind of
• 34:35
  Speaker 2: a draining of healthcare, a bleeding of healthcare companies because
• 34:43
  Speaker 2: getting the fat out, cutting the costs down.
• 34:46
  Speaker 1: So I'm going to ask you a question now, but
• 34:49
  Speaker 1: it applies to insurance also, which we haven't we'll talk
• 34:53
  Speaker 1: about in a minute, But there are regulatory agencies at
• 34:59
  Speaker 1: the federal level. Well, every state has a medical board.
• 35:03
  Speaker 1: How does this sort of four care profit with a
• 35:08
  Speaker 1: much worse mortality rate and much worse health outcomes, how
• 35:14
  Speaker 1: do they get by the state regulators? It would you
• 35:17
  Speaker 1: would imagine that statewide regulatory medical boards wouldn't really tolerate this.
• 35:24
  Speaker 2: This is a sixty four trillion dollar question, Barry, and
• 35:27
  Speaker 2: I would love for you to ask every state attorney general,
• 35:31
  Speaker 2: for instance, why haven't you gone after for profit medicine.
• 35:37
  Speaker 2: There is there are statutes in more than thirty states
• 35:41
  Speaker 2: across the country that bar what's called the corporate practice
• 35:46
  Speaker 2: of medicine. And these laws came into effect, you know,
• 35:51
  Speaker 2: one hundred years ago when you had you know, quack
• 35:54
  Speaker 2: medicine show guys you know, out there selling you know,
• 35:57
  Speaker 2: crazy chures for everything, and they decided, these states decided
• 36:02
  Speaker 2: that you can't have profits potentially coming ahead of patient care.
• 36:07
  Speaker 2: And so doctors actually have to run these organizations. And
• 36:12
  Speaker 2: that is supposedly going to keep from a problem of
• 36:17
  Speaker 2: putting profits ahead of patients. But very very very few
• 36:22
  Speaker 2: state ags have enforced laws against the corporate practice of medicine.
• 36:28
  Speaker 2: And when they do bring cases. They are so tiny
• 36:32
  Speaker 2: and so minimalistic in the risk slap that they deliver
• 36:38
  Speaker 2: to these companies that it really is not even a
• 36:40
  Speaker 2: cost of doing business. And so it's just like, okay, fine,
• 36:43
  Speaker 2: I'll do it again and even bigger next time.
• 36:46
  Speaker 1: So let's talk insurance. The insurance policy stuff seems just
• 36:51
  Speaker 1: absolutely egregious. How did private equity step into the insurance area? Again?
• 36:59
  Speaker 1: A very heavy regulated industry with separate, very robust statewide
• 37:06
  Speaker 1: oversight panels and boards. What's going on in the world
• 37:09
  Speaker 1: of insurance.
• 37:11
  Speaker 2: Well, I'm very interested to hear you say. It's very
• 37:13
  Speaker 2: robust on the state side.
• 37:15
  Speaker 1: At least that's how it's presented. Talk to people who
• 37:19
  Speaker 1: try and get licensed to do insurance things, or if
• 37:23
  Speaker 1: there's a failure to pay out a policy in the
• 37:26
  Speaker 1: litigation that follows, there seems to be some options for policyholders,
• 37:35
  Speaker 1: especially if you have a receptive governor or a state
• 37:39
  Speaker 1: attorney general who can apply pressure through these insurance boards.
• 37:43
  Speaker 1: Although maybe I'm living in the past.
• 37:46
  Speaker 2: Well, I think it's spotty. Let's just say that there
• 37:49
  Speaker 2: are some states where the regulation is aggressive, but there
• 37:54
  Speaker 2: are a lot where it is not. And as you
• 37:57
  Speaker 2: might guess some of these companies flock to the one
• 38:00
  Speaker 2: to the states where the oversight is more of the minimalistic. Now,
• 38:05
  Speaker 2: the problem with insurance companies being owned by private equity
• 38:10
  Speaker 2: is that you can understand why they want to own
• 38:13
  Speaker 2: them because this is a pool of assets. It's a
• 38:17
  Speaker 2: pool of money that they can really generate immense profits on.
• 38:23
  Speaker 2: And it's unlike banks. It's not fast money or hot money.
• 38:29
  Speaker 2: It isn't likely to leave quickly berry like we've seen
• 38:33
  Speaker 2: in some of the recent bank problems. So insurance companies
• 38:38
  Speaker 2: are really huge pools of very stable money for these companies,
• 38:46
  Speaker 2: for these private equity companies. And it's interesting because you're
• 38:51
  Speaker 2: supposed to in insurance be very conservative and most I
• 38:58
  Speaker 2: think most people who buy insurance policies really would prefer
• 39:03
  Speaker 2: that they're ensure be a conservative entity that not taking risks.
• 39:08
  Speaker 2: We're not swinging for the fences here. You know. Yeah,
• 39:12
  Speaker 2: if I can get a higher yield, that's awesome, but
• 39:16
  Speaker 2: I really want to know that I'm going to get
• 39:18
  Speaker 2: a payout when it comes time for my claim. So
• 39:22
  Speaker 2: what these companies are doing is buying these insurance companies.
• 39:27
  Speaker 2: They're also buying up pension assets very So a corporation
• 39:32
  Speaker 2: has a pension, let's say it's Lockheed, Bristol Myers or
• 39:36
  Speaker 2: a couple, and the private equity firm will buy those
• 39:41
  Speaker 2: pension obligations. Lockheed or Bristol Myers gets it off their books,
• 39:47
  Speaker 2: they're happy. They transfer the risk that those obligations had
• 39:51
  Speaker 2: for them, and the private equity firm takes over that risk.
• 39:57
  Speaker 2: But now you don't have the pension benefit gearing corporation
• 40:01
  Speaker 2: backing you if the pension should fail.
• 40:04
  Speaker 1: So a company could just get out from under the
• 40:07
  Speaker 1: PBG by selling it to a third party.
• 40:10
  Speaker 2: Correct. It's called a pension risk transfer, and they have
• 40:14
  Speaker 2: been happening like crazy. And private equity firms are the
• 40:18
  Speaker 2: ones doing a lot of the pension risk transfers.
• 40:20
  Speaker 1: That's really interesting.
• 40:21
  Speaker 2: And so you have pensioners at Bristol Myers or Lockheed
• 40:25
  Speaker 2: or Cores as another who are really relying on private
• 40:31
  Speaker 2: equity to do the right thing for their pensions going forward,
• 40:37
  Speaker 2: for their retirement, for their payouts when they need them.
• 40:41
  Speaker 2: And that I think is something that we really don't
• 40:44
  Speaker 2: understand the entire nature of. And unfortunately we'll see we
• 40:50
  Speaker 2: may see some problems with rising interest rates if some
• 40:54
  Speaker 2: of the investments that these private equity firms have made
• 40:57
  Speaker 2: in their insurance companies start having problems.
• 41:01
  Speaker 1: Are these arms length investments meaning you manage this as
• 41:05
  Speaker 1: a fiduciary on behalf of the pensioner. You can't then
• 41:08
  Speaker 1: turn around and festoon that pension filled with whatever junk
• 41:13
  Speaker 1: paper you're selling to the street, or does that happen?
• 41:17
  Speaker 2: That does happen? Now, they do have to disclose in
• 41:21
  Speaker 2: their statutory filings with the insurance regulators how much of
• 41:25
  Speaker 2: their investment portfolio in the insurance company is related transactions
• 41:32
  Speaker 2: or related stocks or bonds or mortgages or whatever. So
• 41:37
  Speaker 2: they do have to disclose that. But I'm gonna guess
• 41:40
  Speaker 2: that very few people read those disclosures.
• 41:43
  Speaker 1: Huh. Quite interesting. Let's talk about the insurance deal of
• 41:48
  Speaker 1: the century. What's going on with Executive Life, What happened
• 41:52
  Speaker 1: there and how did that go off the rails.
• 41:56
  Speaker 2: Executive Life is where we start sort of the book,
• 42:00
  Speaker 2: because it was such a such a massive failure, and
• 42:05
  Speaker 2: of course it was coming at the time of the
• 42:06
  Speaker 2: junk bond collapse.
• 42:08
  Speaker 1: But this was a triple a highly regarded insurance company beforehand, this.
• 42:14
  Speaker 2: Was a highly rated insurance company had the highest rating,
• 42:18
  Speaker 2: but it was run by a guy who was kind
• 42:21
  Speaker 2: of what we used to call in the old days
• 42:23
  Speaker 2: a gunslinger. He was a guy who was more of
• 42:26
  Speaker 2: a risk taker than your average insurance company executive. And
• 42:30
  Speaker 2: he bought a ton of junk bonds from Drexel. He
• 42:34
  Speaker 2: was one of their top clients when they were selling,
• 42:37
  Speaker 2: you know, these bonds of slightly you know, lower quality, lesser, slightly,
• 42:42
  Speaker 2: lesser known companies. He was there to buy. Okay, so
• 42:46
  Speaker 2: his firm, his insurance company, had a ton of junk bonds,
• 42:50
  Speaker 2: and when that market turned it was dire.
• 42:54
  Speaker 1: So this was really separate from private equity. This was
• 42:58
  Speaker 1: just bad stud ward ship by an insurance executive who
• 43:03
  Speaker 1: should be conservative. And again the question where the regulators
• 43:07
  Speaker 1: when a conservative insurance company is buying junk I mean,
• 43:12
  Speaker 1: it's right there in the name. They don't even hide it,
• 43:15
  Speaker 1: junk bonds. What happened with the executive life they blow up?
• 43:19
  Speaker 2: They blow up. The Department of Insurance for the State
• 43:24
  Speaker 2: of California was at the time run by John Garrimndi,
• 43:28
  Speaker 2: who is now a representative in the House of Representatives
• 43:32
  Speaker 2: from California in Washington, and he was just brand new
• 43:37
  Speaker 2: in the job. It was a new elected position. Prior
• 43:40
  Speaker 2: to that it had been appointees of the government of governor.
• 43:43
  Speaker 1: But we have to run to ye to run that
• 43:46
  Speaker 1: could go right anyway.
• 43:48
  Speaker 2: So he won the big job, and the minute he
• 43:51
  Speaker 2: got in the door, it was, you know, junk bonds
• 43:53
  Speaker 2: were you know, cratering, and everybody was concerned about executive
• 43:57
  Speaker 2: life and would it be able to to pay its
• 44:01
  Speaker 2: policy holders, and so he seized the company. Now keep
• 44:05
  Speaker 2: in mind, Burry, that he seesed it probably at or
• 44:08
  Speaker 2: very near the bottom. Okay, So junk bonds were starting
• 44:12
  Speaker 2: to come back after he seized it. And so if
• 44:16
  Speaker 2: it had been worked out another way, it's possible, like
• 44:21
  Speaker 2: a reorganization, it's possible that the policy holders might not
• 44:25
  Speaker 2: have lost what they ended up losing.
• 44:27
  Speaker 1: What was the haircut the policy holder?
• 44:28
  Speaker 2: You know, it's still to this day we don't know,
• 44:31
  Speaker 2: but it certainly is in the three or four billion
• 44:34
  Speaker 2: dollar maybe.
• 44:37
  Speaker 1: Does that look like a third half a big chunk
• 44:41
  Speaker 1: though it was.
• 44:42
  Speaker 2: A big chunk for many people, you know, I mean
• 44:44
  Speaker 2: I know of some cases where it was forty percent
• 44:47
  Speaker 2: haircut for some policy holders. Right, it's very hard to
• 44:51
  Speaker 2: you know, getting numbers on this stuff. They really don't
• 44:54
  Speaker 2: want to help.
• 44:54
  Speaker 1: Tell us about the crazy rule that said, okay, now
• 44:57
  Speaker 1: we're going to shred all the documents related to this.
• 45:00
  Speaker 1: What the hell was that?
• 45:01
  Speaker 2: Well, okay, so let's just remember this happened in nineteen
• 45:05
  Speaker 2: ninety one. Okay, the insurance department took it over in
• 45:07
  Speaker 2: nineteen ninety one. Then we had Apollo Leon Black's new
• 45:13
  Speaker 2: firm after he flees from Drexel.
• 45:16
  Speaker 1: The record is burning Grexel collapse, Grexel collapse, which arguably
• 45:21
  Speaker 1: he didn't have anything to do with that was mostly Milkin's.
• 45:25
  Speaker 2: No, he was not in the junk bond area. He
• 45:27
  Speaker 2: was a corporate finance person, so he was raising money
• 45:30
  Speaker 2: for these companies.
• 45:31
  Speaker 1: So did he flee or did he just say, hey,
• 45:33
  Speaker 1: let's go launch our own Yeah, let's.
• 45:35
  Speaker 2: Go launch our own company, right, But I mean, it
• 45:37
  Speaker 2: was obviously a dire circumstance. So anyway, long story short,
• 45:43
  Speaker 2: he ends up getting a hold of this huge junk
• 45:47
  Speaker 2: bond portfolio, which was a lot of paper that he
• 45:50
  Speaker 2: had put into Fred Carr's that's the name of the
• 45:53
  Speaker 2: guy who ran Executive Life that paper that Apollo really
• 45:58
  Speaker 2: knew what it was.
• 45:59
  Speaker 1: They was a salesperson and a financer.
• 46:03
  Speaker 2: He was the finance guy, right, and so he knew
• 46:06
  Speaker 2: the numbers, he knew the companies, and so he knew
• 46:08
  Speaker 2: that they were just distressed and that they could be
• 46:12
  Speaker 2: restructured and reorganized. And so he buys this portfolio of
• 46:15
  Speaker 2: John so Way.
• 46:16
  Speaker 1: He's New York based, right, he's New York based and
• 46:19
  Speaker 1: executive life is in California. But because of the relationship
• 46:24
  Speaker 1: with Drexel, he approaches California and says, we'd like to
• 46:29
  Speaker 1: buy this junk paper or did they hold an auction?
• 46:31
  Speaker 1: How did it go?
• 46:32
  Speaker 2: Well, it was with a French bank. Actually they were
• 46:36
  Speaker 2: representing the bank. They were acting as the investment manager
• 46:40
  Speaker 2: for the bank, and so it was going to be
• 46:42
  Speaker 2: taken over by this French bank. But anyway, so the
• 46:46
  Speaker 2: Department of Insurance sold it, sold the company cheap to
• 46:51
  Speaker 2: on the cheap absolutely absolutely, and so the people that
• 46:55
  Speaker 2: bought it in this case, the French bank and Apollo
• 47:00
  Speaker 2: were able to ride the recovery of those junk bonds.
• 47:03
  Speaker 1: So when California sells this is there on behalf of
• 47:07
  Speaker 1: the policyholder, right, that's right? Is there any mandate? Hey,
• 47:11
  Speaker 1: you have to pay ninety cents on the dollar at least,
• 47:13
  Speaker 1: or or there any requirements. They're selling it inexpensively. What
• 47:18
  Speaker 1: riders is California attaching it to the new owners on
• 47:22
  Speaker 1: behalf of the people the California Insurance Board is supposed
• 47:26
  Speaker 1: to be operating on.
• 47:26
  Speaker 2: Well, California at the time said we think this is
• 47:30
  Speaker 2: a great deal. You're going to get at least ninety
• 47:32
  Speaker 2: cents on the dollar. Everybody is going to get at
• 47:34
  Speaker 2: least ninety cents on the dollar. And that is their story,
• 47:37
  Speaker 2: and they're sticking to that, and that's what they say.
• 47:40
  Speaker 1: They didn't require that as part of the purchase.
• 47:43
  Speaker 2: Well, that's what they said was going to happen as
• 47:46
  Speaker 2: part of the purchase.
• 47:47
  Speaker 1: I can't say all sorts of things. But until I
• 47:49
  Speaker 1: sign a contract that says I guarantee that I will
• 47:52
  Speaker 1: pay ninety cents out to each shareholder at a minimum,
• 47:55
  Speaker 1: it's just words.
• 47:57
  Speaker 2: Yeah. Well, what happened was a lot of people did
• 47:59
  Speaker 2: not get ninety cents on the dollar. And there were
• 48:03
  Speaker 2: quite a few people who are very who are up
• 48:05
  Speaker 2: in arms, who wanted, you know, to be this to
• 48:07
  Speaker 2: be investigated. But you know, it is sort of a
• 48:13
  Speaker 2: moment in time that you look at and you say,
• 48:15
  Speaker 2: this is what can happen if an insurance company takes
• 48:19
  Speaker 2: risks with their policyholders' money.
• 48:22
  Speaker 1: Right, This all goes back to the gunslinger as opposed
• 48:25
  Speaker 1: to a conservative operator. There are a couple of other
• 48:28
  Speaker 1: regulatory questions that come up that I'm always sort of
• 48:32
  Speaker 1: fascinated about. The first is the performance reporting for private equity.
• 48:38
  Speaker 1: There have been lots of criticism from within Wall Street
• 48:42
  Speaker 1: that at best it's aggressive and at worst it's just
• 48:47
  Speaker 1: a fantasy. If you're committing capital to private equity, you
• 48:51
  Speaker 1: don't care when they do the purchase the sort of
• 48:54
  Speaker 1: internal rate of return to the endowments and pensions who
• 48:58
  Speaker 1: put money into private equity. They don't care about that,
• 49:02
  Speaker 1: But that seems to be the way they report. Tell
• 49:04
  Speaker 1: us a little bit about how performance numbers are ginned up.
• 49:09
  Speaker 1: I don't even know how to describe it.
• 49:11
  Speaker 2: Well, these are private companies, not the firms themselves. They're
• 49:15
  Speaker 2: publicly traded, as you know, but when they buy a
• 49:18
  Speaker 2: company and put it into a fund, it's a private company.
• 49:21
  Speaker 2: And so how they mark the value of that company
• 49:26
  Speaker 2: is you know, there's leeway there, Barry. They can value
• 49:29
  Speaker 2: it a certain way that. Let's just say the stock
• 49:32
  Speaker 2: market wouldn't value it.
• 49:34
  Speaker 1: But you're valuing it specifically how you're purchasing it, and
• 49:38
  Speaker 1: then if it's sold five years later, that's a hard dollar.
• 49:41
  Speaker 2: Correct.
• 49:42
  Speaker 1: Why is there so much wiggle room in.
• 49:44
  Speaker 2: Between because you haven't had a mark, you haven't had
• 49:48
  Speaker 2: a buyer, I tell you exactly what it's worth until
• 49:51
  Speaker 2: the end of the line when you actually do buy
• 49:53
  Speaker 2: the company.
• 49:54
  Speaker 1: Huh. Really interesting. And let's talk about tax loopholes. How
• 50:00
  Speaker 1: on earth is there still a carried interest tax loophole
• 50:03
  Speaker 1: for private equity, hedge funds and venture capital. You're talking
• 50:08
  Speaker 1: about a teeny tiny fraction of old taxpayers. Why the
• 50:12
  Speaker 1: special treatment?
• 50:14
  Speaker 2: It started out I think as a special treatment for
• 50:18
  Speaker 2: real estate, and it sort of morphed into this bigger,
• 50:23
  Speaker 2: bigger thing as the private equity venture world expanded. And
• 50:30
  Speaker 2: it essentially is that the managers executives of these companies
• 50:35
  Speaker 2: just to end up paying a far far lower rate
• 50:38
  Speaker 2: on their very beneficent payouts than you or I do.
• 50:44
  Speaker 2: And it's a loophole that people have tried to get
• 50:48
  Speaker 2: rid of for decades. We've had congressional hearings about it,
• 50:54
  Speaker 2: and yet it continues to stay on the books, and
• 50:58
  Speaker 2: boy they cry blood murder when it comes time for
• 51:02
  Speaker 2: people to say, look, maybe we should rethink this and
• 51:04
  Speaker 2: not let these guys be I mean, it's like a
• 51:07
  Speaker 2: billionaire minting machine to have this kind of a lower
• 51:10
  Speaker 2: tax rate on these folks.
• 51:13
  Speaker 1: Who wants to pay thirty seven percent when you could
• 51:15
  Speaker 1: pay essentially twenty three percent. Right, of course they're spending
• 51:19
  Speaker 1: money on lobbyists, right, cut my taxes in half? Where
• 51:22
  Speaker 1: do I sign up for that?
• 51:23
  Speaker 2: Yeah?
• 51:23
  Speaker 1: Oh wait, I don't have access to that.
• 51:25
  Speaker 2: Really, start a private equity firm, Barry.
• 51:28
  Speaker 1: So here's what we'll do. We'll start a private equity farm.
• 51:31
  Speaker 1: We'll buy pensions and just put it in the S
• 51:34
  Speaker 1: and P five hundred and cost us five BIPs to
• 51:37
  Speaker 1: manage it. It'll be there's a lot of fat there
• 51:40
  Speaker 1: if he approaches it that way. So let's talk about
• 51:43
  Speaker 1: a little bit of pushback. I've seen some criticisms and
• 51:48
  Speaker 1: some stuff. I want to get your your take on it. First.
• 51:52
  Speaker 1: We touched on this earlier. Aren't the big firms and
• 51:57
  Speaker 1: the LBOs the lever buyouts very different than the middle
• 52:02
  Speaker 1: market smaller private equity firms that provide capital and equity
• 52:08
  Speaker 1: to small companies. How do we you know, aren't you
• 52:11
  Speaker 1: painting with too broad a brush? Goes some of the criticism.
• 52:14
  Speaker 2: Well, if you look at these firms, these folks, these
• 52:19
  Speaker 2: these really titans of industry, right, They're celebrated in the
• 52:23
  Speaker 2: business pages, they are you know, on TV all the time.
• 52:29
  Speaker 2: I mean, these are the people leading the way on
• 52:31
  Speaker 2: this industry. Now, again, there are others who are doing
• 52:35
  Speaker 2: it right and doing it in a better way, yes,
• 52:38
  Speaker 2: but what you want to focus on. These are the
• 52:41
  Speaker 2: folks that's at the tone. These are the folks that say,
• 52:43
  Speaker 2: here's how we're going to operate this. And these are
• 52:47
  Speaker 2: the folks that do have the biggest impact Barry because
• 52:52
  Speaker 2: of their size, and so that's why we really want
• 52:56
  Speaker 2: to focus on them. So when you have, you know,
• 52:59
  Speaker 2: two firms controlling thirty percent of emergency departments in this country,
• 53:05
  Speaker 2: that's a lot, you know, That's why you focus on
• 53:08
  Speaker 2: the big firms. They have the big impact, and so
• 53:12
  Speaker 2: that's why we're doing that.
• 53:13
  Speaker 1: So let's talk about wealth inequality. You guys put a
• 53:16
  Speaker 1: lot of blame on private equity for making it worse,
• 53:20
  Speaker 1: But I look at wealth inequality and wage inequality and
• 53:24
  Speaker 1: it's a lot of things. It's it's low wages and
• 53:26
  Speaker 1: a low minimum wage that hasn't gone up in forever.
• 53:29
  Speaker 1: It's corporate tax avoidance, it's the shifting of the tax
• 53:33
  Speaker 1: burden away from the wealthy and away from corporations to
• 53:37
  Speaker 1: the middle class. Aren't we putting too much blame on
• 53:41
  Speaker 1: private equity for exacerbating wealth inequality in America?
• 53:45
  Speaker 2: Well, the reason we think it's important to include them
• 53:48
  Speaker 2: in the mix is that we haven't really had that discussion.
• 53:52
  Speaker 2: I mean, private equity was not really mentioned as a
• 53:55
  Speaker 2: force in the inequality in the Gulf between rich and poor.
• 53:59
  Speaker 2: In am you know, you would hear about offshoring of jobs.
• 54:03
  Speaker 2: You would hear about companies going to Ireland so that
• 54:07
  Speaker 2: they wouldn't have to pay you know, the high.
• 54:09
  Speaker 1: Taxes, the double Dutch whatever.
• 54:13
  Speaker 2: Whatever, and so there has been a lot of discussion.
• 54:17
  Speaker 2: And of course the you know, uh, the defanging or
• 54:22
  Speaker 2: the the diminishment of unions, so you don't have a
• 54:28
  Speaker 2: balance of power between the worker and the corporation. But
• 54:31
  Speaker 2: you look at some of the forces behind those forces, right,
• 54:35
  Speaker 2: So pensions, great example, if you're starting to see private
• 54:41
  Speaker 2: equity firms taking over pensions, you know, and and or
• 54:46
  Speaker 2: stripping the pensions of the companies that they bankrupt. That
• 54:51
  Speaker 2: is a definite wealth gulf, right, That is a definite
• 54:57
  Speaker 2: impact on every day people main street America that I
• 55:03
  Speaker 2: just don't think we've really examined. So you just have
• 55:06
  Speaker 2: to look behind some of the practices when you have retailing.
• 55:12
  Speaker 2: You know, that's a big force, that a big area
• 55:15
  Speaker 2: that private equity has been very forceful in. You know,
• 55:19
  Speaker 2: almost six hundred thousand jobs lost in retailing. Now, yes,
• 55:23
  Speaker 2: some of that would have happened with the shift online,
• 55:27
  Speaker 2: but honestly, you know, there have been consequences like that.
• 55:31
  Speaker 2: So you look at that, and then you look at
• 55:33
  Speaker 2: the problems with healthcare and what it's doing to patients,
• 55:37
  Speaker 2: and so I do think that it is a force
• 55:40
  Speaker 2: to be reckoned with here.
• 55:42
  Speaker 1: Right, So I'm glad you brought up retail. Some of
• 55:45
  Speaker 1: the pushback I've seen is the United States has been
• 55:48
  Speaker 1: wildly over retailed twenty I think in two thousand and
• 55:53
  Speaker 1: seven we had twenty four square feet per capita versus Europe,
• 55:59
  Speaker 1: which was like fourteen and Japan which was like nine.
• 56:03
  Speaker 1: So we really had far more retailers than we knew
• 56:06
  Speaker 1: what to do. We built way too many malls, and
• 56:10
  Speaker 1: ultimately this was going to go through a huge set
• 56:13
  Speaker 1: of changes anyway. Private equity maybe it accelerated a little bit,
• 56:19
  Speaker 1: but we certainly can't blame the shrinking retail footprint on
• 56:25
  Speaker 1: pe can we.
• 56:26
  Speaker 2: We could maybe put some of it on them, right? Yeah?
• 56:30
  Speaker 2: And obviously you know, the shift online hurt some folks.
• 56:35
  Speaker 2: Toys r Us as an example of that.
• 56:37
  Speaker 1: But you know, more recently, Bedbath and Beyond that was
• 56:40
  Speaker 1: a publicly traded company. They hit the wall without private
• 56:44
  Speaker 1: equities help, That's right. So the biggest pushback I've seen
• 56:50
  Speaker 1: is go back to the eighties and nineties when LBOs
• 56:54
  Speaker 1: were first ramping up. Companies went from big to really big.
• 56:59
  Speaker 1: And as as these big, publicly traded mega companies went
• 57:02
  Speaker 1: up market, the banks, the brokers, all Wall Street chased
• 57:06
  Speaker 1: them and they just created this air pocket, this void
• 57:10
  Speaker 1: underneath where there used to be national banks and national
• 57:16
  Speaker 1: lenders servicing that industry. And they have nobody left to
• 57:21
  Speaker 1: service them. And that vacuum is into what good private
• 57:26
  Speaker 1: equity has stepped. If it wasn't for the private equity
• 57:30
  Speaker 1: below the four biggest companies, there's very little sources of
• 57:33
  Speaker 1: capital for these one hundred five hundred seven hundred million
• 57:37
  Speaker 1: dollar firms that Wall Street ignores.
• 57:40
  Speaker 2: Well, I think you have to say then if you're
• 57:43
  Speaker 2: going to say, Okay, they're not these companies are not
• 57:45
  Speaker 2: being banked properly, then that's great if you can get
• 57:50
  Speaker 2: money from private equity, but let's not bankrupt them in
• 57:55
  Speaker 2: the process. I mean, you have studied a study that
• 57:58
  Speaker 2: shows that bankruptcies her you know, far more with companies
• 58:03
  Speaker 2: that are private equitized than it does with other companies.
• 58:06
  Speaker 2: So I think that you, yes, if you want to
• 58:10
  Speaker 2: have the resources, you know, the capital is not being
• 58:15
  Speaker 2: assigned to these companies, but that doesn't mean that they
• 58:17
  Speaker 2: should be you know, abused, or that some of these
• 58:23
  Speaker 2: practices can't be questioned.
• 58:26
  Speaker 1: And my one of my favorite parts of the book.
• 58:29
  Speaker 1: You talk about equity ownership and wealth ownership in the
• 58:32
  Speaker 1: United States. In nineteen thirteen, the bottom ninety percent of
• 58:37
  Speaker 1: incomes owned about fifteen percent of the wealthy United States.
• 58:42
  Speaker 1: This is real estate businesses and publicly traded companies. By
• 58:46
  Speaker 1: the eighties that had more than doubled to thirty five
• 58:49
  Speaker 1: percent of the wealth in the US. Was that the peak.
• 58:54
  Speaker 1: What happened with that going forward?
• 58:57
  Speaker 2: That was the peak. And one of the reasons for
• 59:01
  Speaker 2: that very big, considerable growth, and that was the you know,
• 59:05
  Speaker 2: people were able to have a family without having two
• 59:08
  Speaker 2: wage earners, right, you were able to buy a house,
• 59:12
  Speaker 2: et cetera that moment in time. Also a huge contributor
• 59:17
  Speaker 2: to that was pensions, so corporate pensions that gave a
• 59:22
  Speaker 2: worker reasonable shot at a prosperous retirement, and those started
• 59:29
  Speaker 2: disappearing in the mid to late eighties. And so that's
• 59:34
  Speaker 2: a big factor in why the wealth held by the
• 59:41
  Speaker 2: main street America, the middle class, the big broad brush America.
• 59:49
  Speaker 2: That's why that has declined.
• 59:51
  Speaker 1: So here's I think my favorite pushback to the conversation
• 59:55
  Speaker 1: about wealth inequality. And I'm curious as to your thoughts.
• 59:59
  Speaker 1: It's not the top ten percent versus the bottom ninety
• 1:00:02
  Speaker 1: percent where that big disparity has opened up. It's not
• 1:00:05
  Speaker 1: even the top one percent versus the bottom ninety nine percent,
• 1:00:09
  Speaker 1: although that's certainly pretty meaty. It's the top point zero
• 1:00:14
  Speaker 1: one percent versus even within the top one percent. There's
• 1:00:19
  Speaker 1: this massive disparity. We didn't used to have that many
• 1:00:23
  Speaker 1: billionaires in uber wealthy today versus I don't know, fifty
• 1:00:27
  Speaker 1: one hundred years ago, how has the distribution of wealth
• 1:00:30
  Speaker 1: shift in the United States, and what might come out
• 1:00:35
  Speaker 1: of that going forward.
• 1:00:36
  Speaker 2: I just don't think it's a good thing to have
• 1:00:39
  Speaker 2: this coterie of extreme, extreme wealth at the top of
• 1:00:45
  Speaker 2: the pyramid. I mean, it's just not healthy. An economy
• 1:00:50
  Speaker 2: does better if the most people are prosperous, right, and
• 1:00:55
  Speaker 2: so these you know, multi multi, multi billionaires are really outliers.
• 1:01:03
  Speaker 2: But it points to a problem with the entire society.
• 1:01:07
  Speaker 2: And perhaps it's because we lawd wealthy people. But part
• 1:01:13
  Speaker 2: of it is this tax loophole that really is unfair.
• 1:01:17
  Speaker 2: Part of it is some of the practices that really
• 1:01:21
  Speaker 2: are aggressive and that end up harming companies and workers
• 1:01:27
  Speaker 2: and pensioners. And let's not forget the huge fees that
• 1:01:31
  Speaker 2: pensions pay to buy into private equity funds. And for
• 1:01:37
  Speaker 2: years those private equity funds outperformed the S and P
• 1:01:42
  Speaker 2: but they no longer do.
• 1:01:44
  Speaker 1: So let's hit on that, because that's really interesting. This
• 1:01:47
  Speaker 1: was a small asset class that, whether it was the
• 1:01:52
  Speaker 1: ill liquidity premium or just the ability to go places
• 1:01:56
  Speaker 1: where public markets couldn't, actually did better than the markets.
• 1:02:01
  Speaker 1: That risk premia seems to have evaporated.
• 1:02:05
  Speaker 2: It stopped out performing in like the mid two thousand so,
• 1:02:10
  Speaker 2: or you know, towards two thousand and eight, and so
• 1:02:14
  Speaker 2: you really have to wonder what the purpose of the
• 1:02:18
  Speaker 2: continued infatuation with private equity among pensions is if they
• 1:02:22
  Speaker 2: can get the same return in a S and P
• 1:02:25
  Speaker 2: five hundred with five basis points as a cost and
• 1:02:29
  Speaker 2: total transparency by the way, and a mark to market
• 1:02:33
  Speaker 2: that you see at the end of every business day
• 1:02:35
  Speaker 2: and so you know where you stand. So it's not
• 1:02:38
  Speaker 2: one of these fuzzy math situations where you don't really
• 1:02:41
  Speaker 2: know what the value of the fund is because it's
• 1:02:43
  Speaker 2: got private companies in it that are being marked by individuals,
• 1:02:48
  Speaker 2: you know, who have an ax to grind in the mark.
• 1:02:51
  Speaker 1: Really quite interesting, So let me give you one of
• 1:02:54
  Speaker 1: my curveball questions I like to surprise guests with. So
• 1:02:59
  Speaker 1: your care your history is Money Magazine in the early
• 1:03:02
  Speaker 1: mid eighties and then Forbes and then Worth Magazine. But
• 1:03:08
  Speaker 1: while you were at Forbes in nineteen ninety five, you
• 1:03:12
  Speaker 1: get tapped to be press secretary for then presidential election
• 1:03:16
  Speaker 1: candidate Steve Forbes. What was that? Like, how different are
• 1:03:20
  Speaker 1: political campaigns from covering finance?
• 1:03:24
  Speaker 2: Well, when Steve asked me to be his press secretary.
• 1:03:28
  Speaker 2: It was I thought, wow, this is going to be interesting.
• 1:03:31
  Speaker 2: You know, I even maybe thought this is going to
• 1:03:33
  Speaker 2: be fun. Right now, I'm a financial reporter, I am
• 1:03:36
  Speaker 2: not a Washington reporter, not a political reporter, and so
• 1:03:40
  Speaker 2: it was I had a different, you know, idea of
• 1:03:42
  Speaker 2: what it might be like. But anyway, it was a
• 1:03:46
  Speaker 2: very very tough six months, I can imagine, and you
• 1:03:50
  Speaker 2: know it was. So Steve was a candidate that had
• 1:03:54
  Speaker 2: economic ideas, okay, and one of them was the flat tax, which,
• 1:04:00
  Speaker 2: by the way, would have gotten rid of lobbyists.
• 1:04:02
  Speaker 1: That was big benefles and all.
• 1:04:05
  Speaker 2: Those loopholes, right, flat tax. He was also for you know,
• 1:04:10
  Speaker 2: medical savings accounts and health savings accounts anyway, and so
• 1:04:14
  Speaker 2: I would have I would explain these concepts. And he
• 1:04:17
  Speaker 2: was against the double taxation of dividends, which of course
• 1:04:20
  Speaker 2: we have gotten rid of I think. Anyway, So those
• 1:04:23
  Speaker 2: were sort of three of his initial ideas, and I
• 1:04:28
  Speaker 2: would have to explain these to the Washington press corps.
• 1:04:32
  Speaker 2: The Washington press corps not being financially oriented and probably
• 1:04:37
  Speaker 2: not that interested. They were just interested in the horse race.
• 1:04:40
  Speaker 2: Now you know, Now we had he did very well
• 1:04:44
  Speaker 2: in New Hampshire, and so for a frenzied moment, it was,
• 1:04:48
  Speaker 2: you know, like this, you know, maybe he has a
• 1:04:50
  Speaker 2: chance or a shot. But anyway, it was it was
• 1:04:54
  Speaker 2: a very trying time for me, but I really became
• 1:04:58
  Speaker 2: a better journalist because of it.
• 1:05:00
  Speaker 1: Well that I was going to go there with that question,
• 1:05:02
  Speaker 1: what was it like being on the other side of
• 1:05:05
  Speaker 1: the clamoring that scrum that you always see the photos of.
• 1:05:10
  Speaker 1: How did that change how you do journalism and view journalists?
• 1:05:15
  Speaker 2: Well, I really after that decided that I really wanted
• 1:05:20
  Speaker 2: to give people a lot more time to respond to
• 1:05:25
  Speaker 2: my questions. And because I would be asked to answer
• 1:05:30
  Speaker 2: questions that were quite you know, comprehensive and or tricky,
• 1:05:34
  Speaker 2: difficult to come up with the answer in you know,
• 1:05:37
  Speaker 2: like minutes, and so it was very frustrating to not
• 1:05:41
  Speaker 2: be able to do that. And so I came away
• 1:05:43
  Speaker 2: from that experience saying, Okay, from now on, I'm going
• 1:05:45
  Speaker 2: to give everybody that I'm writing about more time to
• 1:05:49
  Speaker 2: respond because I don't want to be in that put
• 1:05:51
  Speaker 2: them in the situation that I was in.
• 1:05:53
  Speaker 1: Huh, all right, we only have you for a few
• 1:05:55
  Speaker 1: more minutes. Let me jump to my favorite questions that
• 1:05:58
  Speaker 1: we asked all of our guests, starting with tell us
• 1:06:02
  Speaker 1: what you're streaming, what are you watching listening to? What's
• 1:06:05
  Speaker 1: keeping you entertained?
• 1:06:07
  Speaker 2: What am I streaming? Well, gosh, I really like the
• 1:06:10
  Speaker 2: BBC show Happy Valley. I don't know if you've seen that.
• 1:06:13
  Speaker 2: It's a kind of a detective, a pretty tough female
• 1:06:16
  Speaker 2: detective like that. I like Ted Lasso. I know that's
• 1:06:21
  Speaker 2: very mundane, but so those are the two right now.
• 1:06:26
  Speaker 1: Tell us about mentors who helped shape your career.
• 1:06:30
  Speaker 2: Jim Michaels, who was the editor of Forbes magazine. He
• 1:06:35
  Speaker 2: was a very tough, old newspaper reporter. He was at
• 1:06:41
  Speaker 2: UPI and he was the guy who broke the story
• 1:06:44
  Speaker 2: of Gandhi's assassination, so really knew how to do that
• 1:06:48
  Speaker 2: kind of you know, reporting. But he took his expertise
• 1:06:51
  Speaker 2: to business and really taught me how to look at businesses,
• 1:06:56
  Speaker 2: analyze balance sheets, income statements, really do contrarian reporting. He
• 1:07:03
  Speaker 2: was a guy who didn't want, you know, the conventional wisdom.
• 1:07:06
  Speaker 2: He wanted to question the conventional wisdom. He was very difficult,
• 1:07:09
  Speaker 2: very irascible, very demanding, but you really learned a lot.
• 1:07:12
  Speaker 1: Huh interesting. Let's talk about books. What are some of
• 1:07:16
  Speaker 1: your favorites and what have you been reading recently.
• 1:07:19
  Speaker 2: I like nineteenth century fiction, so Anthony Twallop The Way
• 1:07:25
  Speaker 2: We Live Now, which is a really wonderful book about
• 1:07:29
  Speaker 2: a tycoon who is, you know, sort of a scoundrel
• 1:07:35
  Speaker 2: who sells shares in a railroad company that doesn't really
• 1:07:39
  Speaker 2: exist anyway.
• 1:07:41
  Speaker 1: Well, if you want the railroad to exist, that'll cost
• 1:07:44
  Speaker 1: you more.
• 1:07:45
  Speaker 2: Yes, Right now, I'm actually reading a biography of Genghis Khan.
• 1:07:51
  Speaker 1: Oh, which one Weatherford Jack Weatherford. It's I'm not sure
• 1:07:56
  Speaker 1: if that's the one I read, but it's amazing.
• 1:07:58
  Speaker 2: Yeah, And you know, that's a who's been kind of us.
• 1:08:03
  Speaker 2: He was kind of slimed, you know, and you know,
• 1:08:05
  Speaker 2: as being this terrible you know, marauder and everything, and
• 1:08:09
  Speaker 2: it's it's a different story altogether. So I'm really enjoying that.
• 1:08:14
  Speaker 1: Our last two questions, what sort of advice would you
• 1:08:17
  Speaker 1: give to a recent college grad who was interested in
• 1:08:20
  Speaker 1: a career in either investigative journalism or finance.
• 1:08:25
  Speaker 2: Well, I would, of course say go with investigative reporting,
• 1:08:30
  Speaker 2: because I think we need more of it in this country.
• 1:08:33
  Speaker 2: I think we don't have as much as we need.
• 1:08:37
  Speaker 2: We have seen newspapers hollowed out, of course, closed down.
• 1:08:41
  Speaker 2: We've also seen that the costs of you know, associated
• 1:08:44
  Speaker 2: with investigative reporting. It's not easy. It's not something that
• 1:08:47
  Speaker 2: happens overnight. So it really is costly, and we've seen
• 1:08:50
  Speaker 2: that fewer and fewer of those folks. So I would say,
• 1:08:54
  Speaker 2: gung ho, if you can get a job doing that,
• 1:08:56
  Speaker 2: that it is going to be the most fun that
• 1:08:58
  Speaker 2: you're going to have. And also, so I'm doing a service.
• 1:09:02
  Speaker 1: And what do you know about the world of investigative
• 1:09:05
  Speaker 1: reporting and finance today you wish you knew back in
• 1:09:09
  Speaker 1: the early eighties when you were first getting started.
• 1:09:12
  Speaker 2: Well, let's see, So what's about the world of finance
• 1:09:15
  Speaker 2: that I wish I knew thirty years ago? Is that
• 1:09:17
  Speaker 2: it isn't as hard as you think that it isn't.
• 1:09:20
  Speaker 2: You know, A lot of people come out of college
• 1:09:22
  Speaker 2: if they're not a financial person, like I was a
• 1:09:25
  Speaker 2: humanities major, you know, and you have this mental block
• 1:09:28
  Speaker 2: about numbers. I can't do numbers, or you know, it's
• 1:09:31
  Speaker 2: not that hard. It really isn't that hard. It's common sense.
• 1:09:34
  Speaker 2: Now there are people who are really extra special good
• 1:09:37
  Speaker 2: at it, but you know it's something that you can
• 1:09:40
  Speaker 2: can tackle. Don't feel like you have a mental block
• 1:09:43
  Speaker 2: against finance, and don't think that finance isn't important. Finance
• 1:09:47
  Speaker 2: is not a backwater is. It touches everyone. It touches
• 1:09:52
  Speaker 2: everybody in this country. It is political, it is everywhere,
• 1:09:56
  Speaker 2: and so just don't discount the importance of finance.
• 1:10:00
  Speaker 1: Really interesting. Thank you Gretchen for being so generous with
• 1:10:03
  Speaker 1: your time. We have been speaking with Gretchen Morgensen. She
• 1:10:07
  Speaker 1: is the author of These Are the Plunderers, How Private
• 1:10:10
  Speaker 1: Equity Runs and RECs America. If you enjoy this conversation,
• 1:10:15
  Speaker 1: well be sure and check out any of the previous
• 1:10:17
  Speaker 1: five hundred we've done over the past I don't know
• 1:10:20
  Speaker 1: eight years. You can find those on YouTube, iTunes, Spotify,
• 1:10:26
  Speaker 1: or wherever you find your favorite podcasts. Sign up for
• 1:10:30
  Speaker 1: my daily reading list at Rid Halts dot com, follow
• 1:10:32
  Speaker 1: me on Twitter at Ridholt's follow all of the Bloomberg
• 1:10:37
  Speaker 1: Family of podcasts at Podcasts. I would be remiss if
• 1:10:41
  Speaker 1: I did not thank the crack team that helps put
• 1:10:43
  Speaker 1: these conversations together each week. Sarah Livesey is my audio
• 1:10:47
  Speaker 1: engineer at Tika of albrun is my project manager. Paris
• 1:10:52
  Speaker 1: Walt is my producer. Sean Russo is my researcher. I'm
• 1:10:57
  Speaker 1: Barry Ridholts. You've been listening to Mass in Business on
• 1:11:01
  Speaker 1: Bloomberg Radio.