Speaker 1: This is Master's in Business with Very Riddholts on Bloomberg Radio.
Speaker 1: This week on the podcast, I have an extra special guest.
Speaker 1: Her name is Bethany McClain. She is the author, most
Speaker 1: recently of Saudi America, all about the rise of fracking.
Speaker 1: It's really a fascinating book that brings up all sorts
Speaker 1: of interesting things that I had never considered before about fracking,
Speaker 1: most notably the direct line from the financial crisis and
Speaker 1: the very low rates we've had to the fracking boom
Speaker 1: of the ensuing decade. UM. Bethany is a highly regarded
Speaker 1: author who has written numerous books, many of which UM
Speaker 1: have won awards in our and are highly thought of.
Speaker 1: She's one of my favorite writers. I find her stuff
Speaker 1: absolutely fascinating, and I think you'll find this conversation fascinating
Speaker 1: as well. So, with no further adoo my conversation with
Speaker 1: Bethany McClain. I'm Barry Ritults. You're listening to Master's in
Speaker 1: Business on Bloomberg Radio. My extra special guest this week
Speaker 1: is Bethany McClean. She is a contributing editor at Vanity Fair.
Speaker 1: She also spent three years in the investment banking department
Speaker 1: of Goldman sachs Uh, from which she joined Fortune as
Speaker 1: a reporter. She is known for her books. Probably the
Speaker 1: most famous one is Smartest Guys in the Room, The
Speaker 1: Amazing Rise and Scandalous Fall of Enron. Eventually that became
Speaker 1: an Academy Award nominated documentary. She also wrote the book
Speaker 1: Shaky Grounds, The Strange Saga of the US Mortgage Giants
Speaker 1: and All the Devils Are Here, The Hidden History of
Speaker 1: the Financial Crisis. Her latest book Saudi America, The Truth
Speaker 1: about Fracking and how It's changed the World. Bethany McLean,
Speaker 1: Welcome back to Bloomberg. Thank you so much for having
Speaker 1: me so. I really enjoyed the book Saudi America. And
Speaker 1: let's jump right into that because there's some really fascinating things.
Speaker 1: I have to start with a quote that really stood
Speaker 1: out to me. Quote, the most vital ingredient in fracking
Speaker 1: isn't chemicals, but capital. If it wasn't for historically low
Speaker 1: interest rates, it's not clear there would even have been
Speaker 1: a fracking boom. Now, all this time I've been told
Speaker 1: that it's technology that's driving fracking. You're saying it's not.
Speaker 1: It's ultra low interest rates. It certainly is technology as well.
Speaker 1: Horizontal drilling is a big is a big innovation, So
Speaker 1: I do want to I do want to give credit
Speaker 1: to that. But I think most people when they focus
Speaker 1: on the problems with fracking are the issues. They focus
Speaker 1: on the environmental issues. Very few people focus on the
Speaker 1: shaky financial foundation of of the fracking industry. And this
Speaker 1: is an industry that needs huge amounts of capital. Um
Speaker 1: need huge amounts of capital are require to drill a well.
Speaker 1: And then because the decline rates of the wells are
Speaker 1: so steep, if you are going to maintain production or
Speaker 1: grow your production every year, you get on this treadmill
Speaker 1: of constantly needing more capital. So most shale companies have
Speaker 1: have an a fair amount of debt, and so if
Speaker 1: it weren't for record low interest rates, it's unclear that
Speaker 1: they would have been able to raise all the debt
Speaker 1: that they needed to get this thing going the way
Speaker 1: it did. Let's talk about those decline rates. You cite
Speaker 1: a study in the book you side a study by
Speaker 1: the Kansas City Federal Reserve that showed the average well
Speaker 1: in the Bachan region first year decline of output is six.
Speaker 1: Within three years it's eight. So what do they have
Speaker 1: a very short window to squeeze whatever they can out
Speaker 1: of that well. Yes, and you can make one well
Speaker 1: can be profitable in a simple return on capital analysis.
Speaker 1: But if you're part of a publicly traded company and
Speaker 1: you need to show growth in production every single year,
Speaker 1: you're on this treadmill of constantly needing to raise more
Speaker 1: capital in order to show production growth. And the big
Speaker 1: question overhanging the shale industry is does that ever come
Speaker 1: to an end? Is there a point where this industry
Speaker 1: begins to produce free cash flow? Because right now it doesn't.
Speaker 1: It depends on the large guess of Wall Street um
Speaker 1: being willing to fund it. So so let's talk about
Speaker 1: that a second. You describe how how fracking developed with
Speaker 1: thousands of wildcatters. They would go out, they would get
Speaker 1: these land leases. They were deploying the technology using horizontal drilling,
Speaker 1: lots of Canadian sands, and all sorts of other surprising
Speaker 1: things I had no idea about. You're suggesting that these
Speaker 1: one off drills themselves, these one off wells themselves, they
Speaker 1: were profitable for those wildcatters. A one off well can
Speaker 1: be profitable, yes, not as profitable I think as people
Speaker 1: think it is I got some numbers for the returns
Speaker 1: at the wellheads on a bunch of the wells that
Speaker 1: Aubrey McClendon, who's the most colorful character and this whole
Speaker 1: story the former CEO of Chesapeake had, And even at
Speaker 1: the wellhead those returns were at nine percent. That's before
Speaker 1: the cost of marketing and transporting that the gas. It's
Speaker 1: not clear how profitable, but some wills can be profitable.
Speaker 1: The problem is for publicly traded companies, or for any
Speaker 1: company that needs to show growth um that they get
Speaker 1: on this basically the steamroller of needing to raise more
Speaker 1: capital all the time. So you mentioned Aubrey McLennan. He
Speaker 1: looms large over both fracking. He's the founder of Chesapeake
Speaker 1: and really the father of capital. Reason I had no
Speaker 1: idea who this person was before reading the book. Tell
Speaker 1: us a little bit about him and some of his
Speaker 1: outrageous leverage and some of the things he did. Really
Speaker 1: a colorful and fascinating person in Saudi America. So I've
Speaker 1: been fascinated with Aubrey mcclennon going back to two thousand
Speaker 1: and ten. A guy I talked to a lot used
Speaker 1: to tell me with some degree of hyperbole, that McClendon
Speaker 1: was the most important man in America and really, and
Speaker 1: what he meant by that was that if McClendon was
Speaker 1: right and our country could produce immense amounts of cheap
Speaker 1: natural gas, that really changed the future of of the country.
Speaker 1: It made us an energy rich place where manufacturing of
Speaker 1: all kinds would would relocate if McClendon was wrong and
Speaker 1: this wasn't economic. And this friend of mine and his
Speaker 1: partner used to have this debate all the time. The
Speaker 1: partner would say, the oil and gas were real, and John,
Speaker 1: my friend John, would say, yeah, but the economics don't work. Um.
Speaker 1: Aubrey was the guy that the technological development of shale
Speaker 1: credit goes to somebody else, a guy named George Mitchell,
Speaker 1: But the father of capital raising was Aubrey McClendon. This
Speaker 1: guy was one of the best salesman the world has
Speaker 1: ever seen. He could get anyone to give him money.
Speaker 1: Had this great story in the book from an analyst
Speaker 1: who is at a big investment firm who was very
Speaker 1: skeptical of McClendon and of Chesapeake, and he said, I'd
Speaker 1: never let him in the door to talk to our people,
Speaker 1: because we would have ended up investing, and it wouldn't
Speaker 1: and it wouldn't have ended well. UM and McClendon had
Speaker 1: this larger than larger than life personality and life he
Speaker 1: really sort of remade Oklahoma City. Chesapeake was this extravagant
Speaker 1: company with daycare on premises and a massage studio. I
Speaker 1: mean it was Silicon Valley transported to Oklahoma City. UM
Speaker 1: and McClendon died essentially bankrupt in a fiery car crash
Speaker 1: in the spring of two thousand sixteen, right after he
Speaker 1: had been indicted by the Justice Department, accused of rigging
Speaker 1: rigging deals to buy land. And when he died, American
Speaker 1: shail was flat on its back. It looked like this
Speaker 1: was this was the end. Thanks to UM some of
Speaker 1: the some of the strategy OPEC pursued, and so McClendon's
Speaker 1: death was it was as if it underscored the problems
Speaker 1: with the American shale industry. There's a stat in the
Speaker 1: book that really stunned me. From two thousand and one
Speaker 1: to two thousand and twelve, Chesapeake sold sixteen point four
Speaker 1: billion dollars worth of stock and fifteen point five billion
Speaker 1: dollars worth of debt. It's a nice balanced portfolio there, uh,
Speaker 1: and paid Wall Street more than one point one billion
Speaker 1: in fees. So when you say capital was the key
Speaker 1: driver fracking, at least that at Chesapeake, that seems like
Speaker 1: an awful lot of money. That is an awful lot
Speaker 1: of money. And I'd add that that's not the only
Speaker 1: amount that Chesapeake raised. They raised probably another thirty billion
Speaker 1: dollars in ways that are a bit more subterranean than
Speaker 1: public sales of equity and debt. They did these and
Speaker 1: run esque prepaid deals where they'd sell natural gas forward
Speaker 1: and get the cash now and not book that as alone,
Speaker 1: but it essentially is alone, right, and pulling forward forward
Speaker 1: revenues to encounting it today. Yeah, and they did over
Speaker 1: twenty billion of of those kind of deals, and so
Speaker 1: so even that huge, stunning number actually understates the sheer
Speaker 1: amount of capital they raised. And with all of that,
Speaker 1: Chesapeake never before asset sales to soccers. Essentially, Chesapeake never
Speaker 1: produced free cash flow. And so people would look at
Speaker 1: that and say, well, that's just Chesapeake. Aubrey McClendon is this,
Speaker 1: He's the larger than life character that's not emblematic of
Speaker 1: the rest of the industry. But it actually is. Aubrey
Speaker 1: McClendon is the rest of the industry on steroids much
Speaker 1: more extreme, but the rest of the industry was cash
Speaker 1: flow negative as well. There's a data point from the book,
Speaker 1: and I'm I'm thumbing through my notes to try and
Speaker 1: find it where you said something like the total investment
Speaker 1: dollars that the industry drew in was far, far in
Speaker 1: excess of the total value of the gas they pulled out,
Speaker 1: or or am I misquoting learn No, it's a number
Speaker 1: from David Einhorn. So people you obviously known people on
Speaker 1: this podcast will probably know Einhorn well, But for those
Speaker 1: who don't, he's a very well known hedge fund manager
Speaker 1: who famously called Lehman before the financial crisis of two
Speaker 1: thousand and eight. Relevant again, given given where we are
Speaker 1: right now, we're recording this literally three days before the
Speaker 1: anniversary of Lehman's collapse, exactly, so in early two thousand fifteen,
Speaker 1: David Einhorn, there's a lot of skepticism about SAIL for
Speaker 1: exactly the reasons we're discussing, and Einhorn was the first
Speaker 1: one to really go public and to put put numbers
Speaker 1: to this whole thing, and he calculated that um, the
Speaker 1: shale industry had outspent its outspent its cash flow by
Speaker 1: eighty billion dollars. So that's amazing. It's not that they
Speaker 1: spent eighty and and the time frame for that is
Speaker 1: oh six, It's not that they spent eighty billion. They
Speaker 1: spent eighty billion more than the value of the oil
Speaker 1: and gas they sold. Yes, that's just a start. And
Speaker 1: you have to remember that that was a period when
Speaker 1: oil prices were over a hundred dollars a barrel, and
Speaker 1: it encompasses a period when natural gas prices were over
Speaker 1: ten dollars as well. And so it's what the argument
Speaker 1: of skeptics is that this is an industry that can't
Speaker 1: make money with super high commodity prices. Forget super low
Speaker 1: commodity prices. Right, Let's let's talk a little bit about that,
Speaker 1: because is a quote from an analyst in the book
Speaker 1: that I really liked. With oil, there's a price that
Speaker 1: kills supply and there's a price that kills demands. So
Speaker 1: two questions about that, First x landing exactly what that means,
Speaker 1: and then secondly, where are we in that cycle? Well,
Speaker 1: what he meant by that is that there's a price
Speaker 1: that's so low that nobody can make money, although meaning
Speaker 1: people don't explore, they don't drill, they'd rather just sit
Speaker 1: around away, right, And that actually put that that actually
Speaker 1: pushes us toward lower cost sources of supply, because if
Speaker 1: you think about the world, there are places that can
Speaker 1: get oil out of the ground for a really small
Speaker 1: amount of money, namely Saudi Arabia. Their their immense oil field.
Speaker 1: UM is probably the cheapest place to extract oil in
Speaker 1: the world. I think they've said their cost is about
Speaker 1: ten dollars a barrel, although in the book you describe
Speaker 1: that their own financial situation has changed the world, so
Speaker 1: they they really need seven or eighty dollars to oil
Speaker 1: in order to pretty much be break even versus their
Speaker 1: own infancy. That's because of their public spending on other
Speaker 1: things to keep up populous, a restless populus quiet. So,
Speaker 1: but that's not the actual that's the public spending they've
Speaker 1: layered on top of it, not the actual cost of
Speaker 1: of of of the olive oil. But so it is
Speaker 1: a certain at a certain price, nobody can make money,
Speaker 1: and so exploration stops. And then at a certain price,
Speaker 1: um oil is so high that people start to look
Speaker 1: for substitutes yep. And so that's what this guy meant
Speaker 1: by there's a price that kills supply and a price
Speaker 1: that kills demand. And so the next question is where
Speaker 1: are we in that cycle? Are we about halfway? What
Speaker 1: are we about? Yep. So that's UM much lower than
Speaker 1: people thought oil prices would ever be UM back in
Speaker 1: two thousand and eleven and two thousand and twelve, when
Speaker 1: oil prices were over a hundred dollars a barrel, right,
Speaker 1: and I think it's still not quite high enough for
Speaker 1: Saudi Arabia to be fiscally stable um UM, and whether
Speaker 1: it's a price at which US shale can make money
Speaker 1: or not remains to be seen. People claim. UM proponents
Speaker 1: claim that technological improvements and the beginning of fracking in
Speaker 1: an area of Texas and New Mexico called the Permian
Speaker 1: which has been an oil field for a century but
Speaker 1: has turned out to be really prolific with this new
Speaker 1: technology of fracking, that these things are going to reshape
Speaker 1: the financial firmament of the industry, and so we're going
Speaker 1: to start seeing profits from the from the publicly traded UM,
Speaker 1: from the publicly traded fracking companies. Skeptics say those decline
Speaker 1: rates are still bad. All we're doing by getting more
Speaker 1: oil at the ground more quickly with new technology is
Speaker 1: emptying the well more quickly. We're not increasing the amount
Speaker 1: you can get out over over the life of the well,
Speaker 1: and this still isn't going to work economically. So the
Speaker 1: theory is that within the premium basin, even under seventy
Speaker 1: five dollars a barrel and under five dollars, the linear
Speaker 1: square foot for the um natural natural gas that that's
Speaker 1: or is cubic square FI don't remember the measurement, but
Speaker 1: but it's been three four five dollars recently, premium basin
Speaker 1: can become profitable at those those certain parts of certain
Speaker 1: parts of the premium basin. For sure, it can be
Speaker 1: profitable at those prices. Whether the whole basin can be
Speaker 1: profitable because I profile in the in the book a
Speaker 1: company called eo G that's kind of guarded as the
Speaker 1: Apple of shale if there is a total counterpoint to
Speaker 1: Aubrey McClendon's Chesapeake, it's eo G. Highly efficient, very cost conscious,
Speaker 1: um basically kind of the technocrats of the of of
Speaker 1: of the shale industry, and they say the CEO V
Speaker 1: O G says, all land isn't created equal. The idea
Speaker 1: that you can drill a well in one place in
Speaker 1: the Premian basin, and that means you can drill well
Speaker 1: is everywhere on the Premian basin and produce the same results.
Speaker 1: It's it's crazy. Geology is really complicated, and so he
Speaker 1: he believes that some of what we can extract from
Speaker 1: the Premian basin is at low prices is overstated. Last
Speaker 1: question about Aubrey, because you describe in the book how
Speaker 1: it's not just that he's spending two and five and
Speaker 1: ten x on land leases versus everybody else but his
Speaker 1: own personal life. He's all in on everything. There's no
Speaker 1: safe money, there's no will let me buy my He's
Speaker 1: just fully leveraged, constantly in every segment of his life. Right.
Speaker 1: He struck me as a fascinating character because he wasn't
Speaker 1: just willing to risk other people's money. He was willing
Speaker 1: to risk his own money. He risked every bit of
Speaker 1: money he ever he ever got. There's this great quote
Speaker 1: from him when an analyst on a conference call said,
Speaker 1: at one point, when is enough enough? And he said,
Speaker 1: I can't get enough, and I think that sums up
Speaker 1: the man. But yeah, he bought the Seattle Sonics, moved
Speaker 1: them to Oklahoma City renamed them the Thunder. He had
Speaker 1: mansions around the country, including around the world, including this
Speaker 1: extravagant place on Lake Michigani at an antique map collection.
Speaker 1: And he was best known you'll appreciate this for an
Speaker 1: incredible collection of wine. Um. Someone who knew him told
Speaker 1: me that his collection of wine at one point was
Speaker 1: actually the best in the in the world. Um. He
Speaker 1: had a special love for the really big bottles what
Speaker 1: are those things called the jere boems and the yeah yeah, yeah,
Speaker 1: so the really rare jarrab bones. I mean, he was
Speaker 1: a character fascinating. Let's talk a little bit about your
Speaker 1: writing process and and let me go back to that
Speaker 1: UM column about and Run, the first piece that was
Speaker 1: pretty much the first major mainstream piece that called out
Speaker 1: and Ron for Hey, maybe things are not quite as
Speaker 1: rosy there as the company is claiming. Tell us a
Speaker 1: little bit about that piece and what motivated you to
Speaker 1: turn it into a book. Well, so that piece actually
Speaker 1: came about because when I started working at Fortune, I'll
Speaker 1: give you a little bit of back story. I did
Speaker 1: a column called companies to watch where I was supposed
Speaker 1: to pick stocks every week that we're gonna, you know,
Speaker 1: appreciate thanks task. Well, it was remarkably easy because there
Speaker 1: were no shortage of people coming by fortune, from portfolio
Speaker 1: managers who owned the stock to a company. Management would
Speaker 1: lay out these great little stories from me, and I'd
Speaker 1: write them up because I believed I didn't why would you?
Speaker 1: Why would I doubt them? And I'd watch in horrors.
Speaker 1: The stock promptly went in the opposite direction. So I
Speaker 1: started at a pretty early age trying to get to
Speaker 1: know short sellers because I was just tired of being wrong.
Speaker 1: It wasn't I just I was tired tired of being
Speaker 1: wrong and tired of having people call me up after
Speaker 1: a piece ran and basically saying you idiot, like how
Speaker 1: could you, How could you be writing a puff piece
Speaker 1: about this insane fraud and so anyway, So through that
Speaker 1: I got to know Jim Chainos, and Jim I think
Speaker 1: in the fall of two thousand a fall of two thousand,
Speaker 1: UM said why don't you take a closer look at Enron?
Speaker 1: And it happened to be. It's one of those interesting
Speaker 1: things in life because I have a weird background. I
Speaker 1: was a math major um and I went to work
Speaker 1: at Goldman as an analyst out of college, and so
Speaker 1: I didn't have a writing background at all, And so
Speaker 1: it was kind of serendipity of my weird background actually
Speaker 1: being incredibly helpful, because certainly, at that stage, I still
Speaker 1: knew how to put together, you know, elaborate spreadsheets on
Speaker 1: a company's financials. I was pretty fresh out of out
Speaker 1: of doing that. Eical and and their their financials were
Speaker 1: as transparent and easy don't understand as any on the street. Right,
Speaker 1: So I'd say, over my years in journalism, what's changed
Speaker 1: as I've become far more obsessed with characters, far more
Speaker 1: interested in the human story. But I'm still a numbers
Speaker 1: girl at heart. And so when numbers are contrary and
Speaker 1: don't make sense and aren't what everybody else thinks, or
Speaker 1: how a different picture than what the world thinks is
Speaker 1: going on, Like with shale, most people think what must
Speaker 1: be immensely profitable making gobs of money, and no, actually
Speaker 1: it's not. And so I'm really interested always in those
Speaker 1: disconnects that numbers can show you. How quickly did you
Speaker 1: realize something was afoot at en Ron? When you started
Speaker 1: delving into the numbers. So I would say I was skeptical,
Speaker 1: but not skeptical enough. My original piece, I actually think
Speaker 1: should have won awards for the meekest headline in history
Speaker 1: because the title was his end Run over priced. Um, yeah,
Speaker 1: that turned out to be true. Um anything over zero?
Speaker 1: I just I never would have guessed. Um, I was
Speaker 1: naive then. I never would have guessed that a company
Speaker 1: could be so riddled with over statements and outright fraud
Speaker 1: as as as en Run was. So the piece was skeptical.
Speaker 1: It pointed out problems in en Ron's business. Speaking of
Speaker 1: cash flow, it pointed out en Roun's lack of cash
Speaker 1: flow and it's burgeoning debtload, and the fact that nobody
Speaker 1: understood how this company actually made made its money. But
Speaker 1: if you had asked me at that time that I
Speaker 1: would end Ron be bankrupt in six months or nine months,
Speaker 1: I would have said what now? So you were looking
Speaker 1: at this as an expensive company, not a fraudulent correct, right?
Speaker 1: And how soon was it clear that it was the
Speaker 1: latter and not the former. I think the Enron tail
Speaker 1: unspoiled in an interesting fashion. In August of two thousand
Speaker 1: and one, Jeff Skilling abruptly quit is the company's CEO,
Speaker 1: citing personal reasons, as everybody does. But the idea that
Speaker 1: the mastermind behind this company, who once that I am
Speaker 1: en Ron, was suddenly just stepping down was a real
Speaker 1: sign to people that there were that there were problems.
Speaker 1: And then the Wall Street Journal did some great work
Speaker 1: pointing out these off balance sheet partnerships that the then
Speaker 1: CFO Andy Fasta was running, and the whole thing began
Speaker 1: to create her pretty quickly. So let's talk a little
Speaker 1: bit about your writing process. At what point, obviously, is
Speaker 1: n one blows up, It's clear, Wow, there's a book here.
Speaker 1: But some of the other books you've written, you've co
Speaker 1: authored with various people. Uh, the en Ron book, the
Speaker 1: all the all the devils are here. What makes you
Speaker 1: decide to work with someone else on a book when
Speaker 1: you've been so successful writing on your own. Well, so
Speaker 1: the first two books I did were both big books. Um,
Speaker 1: the en Roun book was I was How old was
Speaker 1: I when I started that? I don't know, thirty one
Speaker 1: and I'd been a journalist for a few years. But
Speaker 1: the longest piece I'd ever written was you know, three
Speaker 1: thousand words and Fortune magazine. I've never even written a
Speaker 1: really long story, let alone written a book. And actually
Speaker 1: collaborating with Peter el Kind and having my old pal
Speaker 1: Jonah Sarah edit it was was the best decision. I mean,
Speaker 1: it's a far better book because of their input and help.
Speaker 1: I learned a lot about um investigative reporting from Peter,
Speaker 1: and I learned a lot about writing from from Joe.
Speaker 1: Joe and I actually co authored All the Devils Are Here,
Speaker 1: and it was, you know, ten years ago about this day.
Speaker 1: We were sitting in my house in Chicago just watching
Speaker 1: the world go up, and in the financial world go up,
Speaker 1: go up, in flames, and we were both we both
Speaker 1: said we have to do a book, and so it
Speaker 1: really just came about organically. It wasn't any kind of
Speaker 1: um stra g on on my part. But again, it's
Speaker 1: a much better book because of because of Joe's collaboration.
Speaker 1: The other two books I've done have been these mini
Speaker 1: books for Columbia and this book's Audi America. As a
Speaker 1: mini books, that's only words. It's a short, quick read. Yeah,
Speaker 1: they're They're meant to be quick takes or a slice
Speaker 1: of a topic, so they're not as all encompassing or
Speaker 1: as demand. They don't take a commitment of your entire
Speaker 1: life the way the way these these bigger books on
Speaker 1: these bigger topics have um too big to read exactly exactly.
Speaker 1: These are not too big to read um and so
Speaker 1: they're more manageable. I guess I would say fascinating. We're
Speaker 1: recording this not too far off from the anniversary of
Speaker 1: the collapse of Lehman Brothers. Let's talk about that a
Speaker 1: little bit. Uh and and during the break we were
Speaker 1: discussing the issue that infuriates me and so many other people,
Speaker 1: why nobody went to jail? What? What are your thoughts
Speaker 1: on this? I do think overall it's harder to send
Speaker 1: people to jail than is commonly thought, because there's a
Speaker 1: difference between what is unethical and what is illegal. And
Speaker 1: sometimes what is unethical is actually worse than what is illegal.
Speaker 1: And that's one of the conundrums of our criminal justice situation.
Speaker 1: Even en Ron wasn't a slam dunk. It was a
Speaker 1: case that took years to prosecute. It was pretty much
Speaker 1: a slam I mean it actually it actually wasn't. And
Speaker 1: Ron went bankrupt in two thousand one. Jeff Skilling wasn't
Speaker 1: indicted until two thousand three. The trial wasn't until two
Speaker 1: thousand and six, and I said, I sat through that
Speaker 1: there was In the end, what Skilling was was indicted
Speaker 1: for was less sweeping than you might expect. It wasn't
Speaker 1: just straight up accounting fraud. No, it was not just
Speaker 1: straight up accounting fraud. Because the accountants and lawyers can
Speaker 1: sign off on things that are clearly misrepresentative of economic reality.
Speaker 1: But once you've gotten accountants and lawyers to sign off
Speaker 1: on them, the Justice Department can't come in after the
Speaker 1: fact and say, well, that's illegal. So it's plausible deniability
Speaker 1: and buyout. And there's some truth to that in the
Speaker 1: financial crisis too. But what we were just talking about,
Speaker 1: which is what mystifies me, is why there were no
Speaker 1: prosecutions around what seemed to be very clear financial fraud,
Speaker 1: which was Wall Street's knowledge that the subprime mortgages it
Speaker 1: was buying did not meet the standards they were promising investors,
Speaker 1: and yet they continued to buy these subprime mortgages and
Speaker 1: package them up into securities and misrepresent the quality of
Speaker 1: those mortgages to to investors. Sounds it sounds like fraud
Speaker 1: to me too, And What's what's infuriating and upsetting about
Speaker 1: this is that the big firms all paid billions of
Speaker 1: dollars to settle these cases, hundreds of billions of dollars,
Speaker 1: and I think it's two hundred and the reference in
Speaker 1: today's columns two hundred forty three billion dollars in fine.
Speaker 1: But literally, if you read the settlements, you can't tell
Speaker 1: what happened. You can't tell if the Justice Department is
Speaker 1: extorting the firms trying to get money out of them,
Speaker 1: or if something really bad happened here, because it's all cloaked,
Speaker 1: it's a settlement. It's all part of what it's all
Speaker 1: part of what I call the shadow legal system, which
Speaker 1: is the way big corporations uh settle allegations outside of
Speaker 1: the public eye. There's no court documents, there's no trial.
Speaker 1: And look, my husband is a litigator. I get why
Speaker 1: this happens, but I think it's really bad for democracy
Speaker 1: and really bad for people's faith in our system to
Speaker 1: have so many of these big cases settled in these
Speaker 1: ways that she had absolutely no light on what actually happened.
Speaker 1: And now some of these cases were settled with admissions
Speaker 1: of guilt, but a lot of them were no admission, no,
Speaker 1: no deny, Just write a check. Just write a check.
Speaker 1: No no, no clear sign of how this happened within
Speaker 1: a company, of who was responsible, of who actually knew
Speaker 1: this was taking place, of who benefited from it, just
Speaker 1: so cloaked that you can't tell from the outside what
Speaker 1: actually happened. Just write a check and make it go away.
Speaker 1: So you're with shareholder's money. By the way, since since
Speaker 1: your numbers, girl, and you spent all that time waiting
Speaker 1: into the balance sheets of UM and Ron, there's two
Speaker 1: really interesting things that come out of that. One is
Speaker 1: the eventual collapse of Arthur Anderson, their auditor. They were
Speaker 1: orderer for a bunch of frauds, not just Enron, but
Speaker 1: World common. I think world uh. Enron was just the
Speaker 1: last straw. In Jesse Eisinger's book whose title I can't
Speaker 1: say on the radio, the Chicken Bleep Club, UM basically
Speaker 1: explains that was the beginning of the end for the
Speaker 1: Department of Justice. Plus nine eleven moved a ton of
Speaker 1: forensic accountants to follow the money. UM. But that's really
Speaker 1: part of it. The other part of it, I'm convinced
Speaker 1: was was that the prosecutors had been convinced that if
Speaker 1: you bring charges, we just bailed out all these banks,
Speaker 1: you're gonna send us right back into the abyss. They
Speaker 1: scared the hell out of everybody. I think that's true too,
Speaker 1: And I think there is a third component as well,
Speaker 1: which is that when Enron was prosecuted so aggressively, it
Speaker 1: was those guys down in Texas. They weren't our right,
Speaker 1: the bankers and the financial crisis were our crowd. They
Speaker 1: were the people that the people in Washington no intimately,
Speaker 1: So there was a preconception that our crowd couldn't have
Speaker 1: engaged in fraud. They didn't. They they're not actually guilty.
Speaker 1: They just got caught up in the hype of the moment,
Speaker 1: whereas when it was those guys down in Texas who
Speaker 1: who aren't our friends, it was an entirely different issue.
Speaker 1: Let me push back against you want, okay, So my theory.
Speaker 1: So that's oh eight. We had the analyst scandal a
Speaker 1: few years before that, we had the I p O
Speaker 1: spinning scandal a few years before that. We had just
Speaker 1: go down the list of all sorts of fraud. Um
Speaker 1: I mentioned Lehman brothers. Given your background, REPO one oh five,
Speaker 1: moving fifty plus billion dollars off the balance sheet every quarter,
Speaker 1: hiding there from investors. How is that not anything more
Speaker 1: than felony fraud? Well, that's my point is that if
Speaker 1: one of the reasons the Justice Department was as not
Speaker 1: willing to be as aggressive as they were with Enron
Speaker 1: is because these guys were people they knew, and so
Speaker 1: they weren't. Do you, Jane, those brothers, I can understand
Speaker 1: if you're gonna say the U S attorney for the
Speaker 1: second District, maybe, and then more more of Hank Pauls
Speaker 1: and Tim Geitner. They all know each other. It's not
Speaker 1: it's it's different than it's different than those people down
Speaker 1: in Texas, those energy people down in Texas. Again, I
Speaker 1: think your two reasons are bigger. I think I think
Speaker 1: that what happened with Arthur Anderson is absolutely part of
Speaker 1: the explanation um And I think the fear of crushing
Speaker 1: the very firms you had just rescued is bigger too.
Speaker 1: I'd put those among the top two reasons. But I
Speaker 1: think there also is this sort of interesting component of
Speaker 1: of it's easier to to aggressively prosecute an outsider than
Speaker 1: it is an insider do you remember the op ed
Speaker 1: written by and it was unusual because it was a
Speaker 1: sitting judge in the Southern District who basically said the
Speaker 1: d J chickened out, They're absolutely were crimes committed, and
Speaker 1: all of the explanations claiming otherwise ring hollow. When was
Speaker 1: the last time we had a sitting judge who covers
Speaker 1: wool Street that's his jurisdiction, right and up as saying,
Speaker 1: why aren't you guys prosecuting? Yeah, I think it. Um,
Speaker 1: it's a question that will always remain from from this episode,
Speaker 1: despite the then head of the Southern District trying to
Speaker 1: distract us all with insider trading charges. So let's talk
Speaker 1: about another bank that you've written about. Um, what's going
Speaker 1: on with Wells Fargo? They were once the model bank
Speaker 1: for good corporate behavior? How did they go so far
Speaker 1: off the rails? Oh? My god? And by the way,
Speaker 1: during this conversation, we've already opened three checking accounts in
Speaker 1: your name from Wells Fargo, which and an insurance bill,
Speaker 1: so I wouldn't be surprised. I mean, it's it actually
Speaker 1: is really disheartening to me because it makes you always
Speaker 1: have to wonder when a company seems to be so
Speaker 1: perfect is there's some deep, dark secret lurking under there.
Speaker 1: And Wells Fargo is the bank that came through the
Speaker 1: financial crisis better than other any any other bank. They
Speaker 1: build themselves as just this goodhearted community bank. The culture
Speaker 1: is the old Norwest Bank UM, which had merged with
Speaker 1: Wells Fargo back and I think UM the late nineties.
Speaker 1: And UM Norwest is a Minneapolis headquartered firm. You know,
Speaker 1: it's got that Midwestern sort of goodness to it. And
Speaker 1: they always in Washington presented themselves as the community bank,
Speaker 1: you know, was the biggest holding of Warren Buffett for
Speaker 1: the long We're not like all those other firms out there.
Speaker 1: And then it turns out they have this really ugly
Speaker 1: um sales culture that puts immense amounts of pressure on
Speaker 1: the people in the system who are least able to
Speaker 1: deal with it, you know, those at the bottom of
Speaker 1: the wrong the tellers to meet these utterly horrible sales goals.
Speaker 1: And we all thought that the problem was confined to
Speaker 1: the retail bank because Wells Fargo has these three different segments.
Speaker 1: That's got its community banking segment, it has its corporate
Speaker 1: banking segment, and has its investment management segment. But now
Speaker 1: it turns out that the sales pressure was felt elsewhere too.
Speaker 1: There were crazy goals in the corporate bank and crazy
Speaker 1: goals which is what the subject of a couple of
Speaker 1: recent articles I've done in the investment management division where
Speaker 1: people were have been given quotas in the same way.
Speaker 1: So this really intent sales culture had actually spread throughout
Speaker 1: the entire bank. Where did that sales culture originate? Where
Speaker 1: did that come from? So I think it came from Dikovasovich,
Speaker 1: who was the CEO of Wells Fargo through the financial crisis,
Speaker 1: and he was the first to start talking about banks
Speaker 1: as stores where you were supposed to sell things to customers.
Speaker 1: And he's the one who coined the now infamous phrase
Speaker 1: eight is great, which is getting every customer at Wells
Speaker 1: Fargo had to um to have at least eight products
Speaker 1: with with the firm. That's where it came from. Whether
Speaker 1: it would have a lot of things from securitization to
Speaker 1: Wells Fargo. Sales culture can start in a place that's
Speaker 1: perfectly okay and then get taken to an extreme and
Speaker 1: tip over into a place that is so not okay.
Speaker 1: And whether whether if Kavassovich had stayed at Wells Fargo,
Speaker 1: whether the sales culture would have tipped over that line
Speaker 1: or not is a debate that nobody will ever be
Speaker 1: able to answer. I mean, but obvious, slee it tipped
Speaker 1: over that line pretty soon after he left. So with
Speaker 1: these his policies, why did everybody stay with this if
Speaker 1: this was such an obviously terrible idea? I think his successor,
Speaker 1: John Stump, who by all accounts as a lovely man,
Speaker 1: was not the sort of executive who was going to
Speaker 1: radically reverse course. And why would you when it appeared
Speaker 1: to work so well? Wall Street celebrated Wells Fargo. It
Speaker 1: had the highest p multiple of any bank for a
Speaker 1: long time because precisely because it did have these amazing
Speaker 1: cross cell numbers. And so when the strategy appeared to
Speaker 1: be working and was winning, you all these plot all
Speaker 1: these all these all this praise, why would you stop it?
Speaker 1: Why would you listen to the whistleblowers inside the bank
Speaker 1: who were saying, this is a real problem. You know.
Speaker 1: The metaphor that always sticks out in my mind is
Speaker 1: you could set the track record on the straightaway, but
Speaker 1: if you can't make the turn and you hit the
Speaker 1: wall that record shouldn't count. And that's kind of like
Speaker 1: Wells Fargos, don't I like that. The thing that really
Speaker 1: bothers me about Wells Fargoes that it seems to me
Speaker 1: a perversion of capital is um in this this sense,
Speaker 1: I have nothing against the people at the top taking
Speaker 1: a lot of money as long as they also bear
Speaker 1: all the risk when things go wrong. Wells Fargo managed
Speaker 1: to put in place a system where the people at
Speaker 1: the very bottom didn't make much money, and they bore
Speaker 1: all the risk because they were the ones who had
Speaker 1: these horrible sales calls. To me, they were the ones
Speaker 1: who got fired if they didn't meet them, and they
Speaker 1: were the ones who got fired if they met them
Speaker 1: in a way that in a way that was was unethical.
Speaker 1: And so all the pressure, all the all the all,
Speaker 1: none of the reward, but all the risk went to
Speaker 1: the people at the bottom of the pyramid, and that
Speaker 1: I think is a perversion, to say the least, Can
Speaker 1: you stick around a bit? I have a ton more
Speaker 1: questions for you. We have been speaking with Bethany McClain.
Speaker 1: She is the author, most recently of Saudi America. If
Speaker 1: you enjoy this conversation, come back and check out the
Speaker 1: podcast extras. Will we keep the tape rolling and continued
Speaker 1: discussing all things fracking, fraud and financial crises. We love
Speaker 1: your comments, feedback and suggestions right to us at m
Speaker 1: IB podcast at Bloomberg dot net. Follow me on Twitter
Speaker 1: at Rid Halts. You can check out my daily column
Speaker 1: on Bloomberg dot com. I'm Barry rit Haults. You're listening
Speaker 1: to Masters and Business on Bloomberg Radio. Welcome to the podcast, Bethany,
Speaker 1: Thank you so much for doing this. I have to
Speaker 1: tell you I sat on the beach a couple of
Speaker 1: weeks ago UM and read Saudi America. It's such a
Speaker 1: weird pair of words to say, because I you feel
Speaker 1: like you're saying it wrong because you are UM. And
Speaker 1: it really it was a fast and really informed him
Speaker 1: and an interesting read. Not just aubury, but the whole
Speaker 1: concept of money driving cat low cost of capital, driving fracking,
Speaker 1: changing the world of energy, changing UH, the Middle East,
Speaker 1: changing the relationship of Russia to Europe. It's really incredibly
Speaker 1: intricate web and you can help, especially this week, you
Speaker 1: can't help but draw a line from Alan Greenspan and
Speaker 1: the post nine eleven pre financial crisis interest rates straight
Speaker 1: to the boom and fracking. So the best compliment I
Speaker 1: could ever get is that one of my books could
Speaker 1: be considered a beach read. So I'm absolutely beyond it.
Speaker 1: Literally literally not just a beach read. But it was
Speaker 1: compelling and in not like I don't get to the
Speaker 1: beach all that early, from from nine ten o'clock in
Speaker 1: the morning to to three in the afternoon straight through.
Speaker 1: It really was a great narrative. There are great characters,
Speaker 1: and there's some really interesting insights. What motivated you to
Speaker 1: to start looking at fracking? Well, so I was always
Speaker 1: obsessed with Aubrey McClendon being really who couldn't be Is
Speaker 1: this related to Enron because he's in a similar part
Speaker 1: of the country. Yes, I have an affinity for these
Speaker 1: these business these characters in the world of business who
Speaker 1: come along every so often, who are larger than life,
Speaker 1: and who really proved the old adage that truth is
Speaker 1: stranger than fiction, and who could be stars in their
Speaker 1: own Shakespearean drama. Whether it's Jeff Skilling, whether it's Mike Pearson,
Speaker 1: whether it's Aubrey McClendon. I find these characters just fascinating.
Speaker 1: What what drives them, what makes them tick? Why their excesses? Um?
Speaker 1: So I? So I was. I was obsessed with Aubrey
Speaker 1: for for years. And then there was this um dichotomy
Speaker 1: between these grand promises of how fracking was reshaping geopolitics,
Speaker 1: with the fact that it doesn't make money, that there's
Speaker 1: this deep skepticism about the industry and this heavy short
Speaker 1: seller interest in it because the companies don't produce free
Speaker 1: cash flow. And so I thought that is a dichotomy
Speaker 1: worth exploring, that a business can be changing the world
Speaker 1: yet not not make any money. And so I thought
Speaker 1: that was that was worth digging into. Who first heared
Speaker 1: you in this direction? Who who said, hey, you should
Speaker 1: look closely? So do you know John Hampton? I know
Speaker 1: the name, sure, So John's uh for a long time
Speaker 1: pall of mine, who lives in Australia runs runs Bronte Capital.
Speaker 1: And he's the one who used to say that Aubrey
Speaker 1: McClendon was the most important guy in America, with again
Speaker 1: some degree of hyperbole. But John was the one who
Speaker 1: first got me interested in Aubrey and got me focused
Speaker 1: on Jessapeake's dire financial condition. So he's an interesting character himself.
Speaker 1: Speaking of interesting characters, his writing is always quite fascinating.
Speaker 1: I get his regular missives and they're always, um, it's
Speaker 1: so refreshing reading something that's just a luloff kilter and
Speaker 1: certainly well thought out and interesting. So what made you
Speaker 1: think this was a mini book and not a full
Speaker 1: blown Oh boys? So as I got into it, I
Speaker 1: realized it probably could have and should have been a
Speaker 1: longer book, because trying to find a path through the
Speaker 1: fracking story that can be told in thirty words or
Speaker 1: so was was a huge challenge. Um. My issue is
Speaker 1: purely a life one to be. To be perfectly honest,
Speaker 1: every time I've written a big book, it's ended up
Speaker 1: costing me, I'd say, a good six months to a
Speaker 1: year of my life where I am just gone. And
Speaker 1: this isn't that the nature of writing that that is
Speaker 1: the nature of writing books. But at this stage of
Speaker 1: my life, I have kids at an age where I
Speaker 1: don't want to miss six months of their life, and
Speaker 1: so it's um so so it's hard, totally totally understandable.
Speaker 1: In the book, you describe Audrey Aubrey's death. He drives
Speaker 1: this big suv. He always drives too fast. He's texting
Speaker 1: while he drives, and he happens to slam into an overpast,
Speaker 1: leading some people dead instantly, leading some people to think, hey,
Speaker 1: he was just indicted. This could be a suicide with
Speaker 1: no suicide note and therefore full insurance and everything else
Speaker 1: that comes with it. The police never found anything related
Speaker 1: to that. What what are your thoughts on this? It's
Speaker 1: one of those great mysteries that you'll you'll you'll never
Speaker 1: quite know, along with why it is that Jeff Skilling
Speaker 1: actually resigned from Enron in the the in the two thousand.
Speaker 1: Aubrey's death is another of those mysteries. The most many
Speaker 1: people believe it must have been suicide. He had just
Speaker 1: been indicted. His empire was in shambles, although that wasn't
Speaker 1: the first time his empire had crumbled. No, it was
Speaker 1: not the first time his empire had crumbled. But but
Speaker 1: but this with but with the indictment, This was this
Speaker 1: was a big one because even if even if people
Speaker 1: view an indictment as being unfair, nobody's going to do
Speaker 1: business with a guy who just co indicted, right, tough
Speaker 1: to money. But but there are other people who say,
Speaker 1: but this was Aubrey. He drove too fast, he's always
Speaker 1: texting while he drove. It's possible he was just exhausted
Speaker 1: and distracted. And so I think the police department was
Speaker 1: unable to make a ruling either way. There's this quote
Speaker 1: in my book from the police captain saying, you know,
Speaker 1: we'll never know what happened. Huh. Quite quite interesting. Who
Speaker 1: else from the book stood out as a really interesting
Speaker 1: character to you? So I think, Um, I think e
Speaker 1: O G. As a company is to be a really
Speaker 1: interesting character. It's former CEO Mark Poppa, who has a
Speaker 1: really nuanced view on the fracking revolution. He isn't a
Speaker 1: pro fracking as as you might think, um, But e
Speaker 1: O G. Um well he's he's he's pro fracking, but
Speaker 1: he's not as sure that it's going to change the
Speaker 1: energy world forever as as other people are. He has
Speaker 1: a nuance to you, um. And so I liked setting
Speaker 1: up E O G. As a counterpoint to Chesapeake, to
Speaker 1: tell the other side of the story, because in the end,
Speaker 1: this isn't a book that says this whole thing is
Speaker 1: a fraud. It's gonna it's destined for a bad, a
Speaker 1: bad ending. Um. I couldn't, I couldn't actually get there Um,
Speaker 1: and so I wanted to tell both sides of the
Speaker 1: story to leave it a little bit open to the
Speaker 1: reader's judgment. The one thing for sure about the history
Speaker 1: of oil overall, in the history of fracking, is that
Speaker 1: everybody who ever makes predictions has been wrong. And so
Speaker 1: i'm i'm, i'm, I'm, I'm not smart enough to to
Speaker 1: say how it's gonna end. So there's a theme that
Speaker 1: runs through all of your books. You're you're never going
Speaker 1: to write the Steve Jobs, you know, hagiography about how
Speaker 1: you know, successful and innovative. The theme throughout all your
Speaker 1: books is there's always too much access. There's always elements
Speaker 1: of fraud. Throughout there are always problems, both legal, personal,
Speaker 1: what have you. It's more than just larger than life personalities.
Speaker 1: It's larger than life personalities who really step in it
Speaker 1: to say the least? Uh So, from Enron to Fannie
Speaker 1: and Freddie to Um, the writings should do about wells Fargo.
Speaker 1: Are you attracted to fraud and nefarious characters or is
Speaker 1: it just a better story? Oh that makes me sound dark. Indeed,
Speaker 1: you're by the way, I wish I could when we
Speaker 1: get a picture later, she's sitting here dressed. I can't
Speaker 1: tell if that's black or blue. That's okay, all dressed
Speaker 1: in black? Care you you are right? Um, I honestly
Speaker 1: I don't know the answer to that. Actually, I think
Speaker 1: of I grew up in Minnesota, and I think of
Speaker 1: myself in many ways as as Minnesota nice. I have
Speaker 1: a hard time being rude to people. I don't like
Speaker 1: it's like Canada nice. Yeah, I don't. I don't have that.
Speaker 1: And I don't actually like confrontation. I don't. I don't
Speaker 1: particularly like fighting with people. So I'm not quite sure.
Speaker 1: I haven't been able to analyze myself enough to know
Speaker 1: why it is that I have sort of come up
Speaker 1: with the specialty of writing about business gone wrong. If
Speaker 1: only you had an outlet to express your outrage. Oh,
Speaker 1: I know, write a bunch of books about it. I
Speaker 1: guess it just I guess it just interests me more
Speaker 1: than stories of of of things going going perfectly. It
Speaker 1: feels it feels more real somehow, um um, And the
Speaker 1: analytical part of me loves trying to figure out how
Speaker 1: it went wrong. How things are working usually seems to
Speaker 1: be squishier and all these you know, generic phrases about
Speaker 1: leadership etcetera, etcetera. Whereas how things went wrong, it's usually
Speaker 1: very grounded in the in the really gritty specifics, and
Speaker 1: I like gritty specifics. I have a pet theory which
Speaker 1: will eventually become a column, and the theory is that
Speaker 1: everybody's conception of the world is wrong because it's just
Speaker 1: examples of survivorship bias. Everything we see means that there
Speaker 1: are a thousand other things that failed, and so we assume, oh,
Speaker 1: this works, this pencil. Look it's gotten a racer and
Speaker 1: it's covered in paint, and it's got a point. Oh
Speaker 1: isn't that great. You don't see the millions of other
Speaker 1: devices that were attempted and failed. And so how else
Speaker 1: can you explain why people keep opening restaurants? Wait, restaurants
Speaker 1: are a terrible investment. Half of them go out in
Speaker 1: six months, the rest go out in two years. It's
Speaker 1: a terrible idea, and yet people keep opening restaurants. We
Speaker 1: all have this long view. You like to look at
Speaker 1: the cd fraudulent underside of things gone awry. I guess
Speaker 1: that's true. I guess I like. I think you can
Speaker 1: learn a lot from stories of business gone wrong too,
Speaker 1: because these, to me, the characters are never as simple
Speaker 1: as purely bad or purely good. Maybe some of them
Speaker 1: are Bernie made off, I think is as close as
Speaker 1: it gets too purely bad. But most of these stories
Speaker 1: aren't so much sort of clear cut criminality as they
Speaker 1: are a mixture of idealism um, arrogance, um, hubris um,
Speaker 1: a little bit of fraud tossed into the mix, um,
Speaker 1: a lot of wishful thinking um. And so they're very
Speaker 1: they're very human stories. And that's that's what draws me
Speaker 1: to them. I always want to understand. I guess it's
Speaker 1: a little bit maybe it's a little bit of a
Speaker 1: version of the famous line from Anna Kranida. You know,
Speaker 1: every happy family is happy in the same way, but
Speaker 1: every unhappy family, that's where you know that is unhappy
Speaker 1: in a different way. And so every story of business
Speaker 1: gone right is kind of the same every story of
Speaker 1: business gone wrong. It's really different and really fascinating. Don't
Speaker 1: don't we learn more from from the mistakes and business
Speaker 1: has gone wrong than the success stories. What do you
Speaker 1: learn from Google? Make the best search engine that and
Speaker 1: figure out how to monetize it. There's not a big
Speaker 1: lesson there, but the disasters there's always lots of lessons.
Speaker 1: There's so many lessons. I mean, here's a gritty one
Speaker 1: from Wells Fargo, which which which I find fascinating. Back
Speaker 1: in two thousand thirteen, the l A Times did a
Speaker 1: story about all the sales pressure and the terrible impact
Speaker 1: it was having, and Wells Fargo ignored it because then
Speaker 1: CEO John Stump said, oh, well, this is only one
Speaker 1: percent of our workforce, so we are actually great. Far
Speaker 1: from criticizing ourselves for this, we should be praising ourselves
Speaker 1: for this because only one percent of our employees has
Speaker 1: ever had a problem. And it's a classic example of
Speaker 1: using math to um justify your wishful thinking. Because in
Speaker 1: a retail sales force that had turnover a year, and
Speaker 1: where that one percent measured the people who got caught,
Speaker 1: not the people who were pressuring them to engage in
Speaker 1: this behavior, not the people who quit because they couldn't
Speaker 1: do it, and not the people who just did it
Speaker 1: because they got away with it. It was a meaningless figure.
Speaker 1: And so that's not math, that's rationalization. But so I
Speaker 1: love that. I love those kind of lessons, right, And
Speaker 1: that's so much more interesting to me than how to
Speaker 1: be a great leader exhibit compassion. I don't know. I'm
Speaker 1: intrigued that there was a story in in where where
Speaker 1: was that l A Times? And the company didn't take
Speaker 1: it seriously. There was, you know, the other bank that
Speaker 1: more or less came through the crisis pretty well was J. P.
Speaker 1: Morgan under Jamie Diamond, and they had an automated underwriting
Speaker 1: system called Zippy and UM. It was a way to
Speaker 1: process more mortgages more quickly, so you can move through
Speaker 1: more through the pipeline. The problem with Zippy was it
Speaker 1: occasionally would reject a mortgage and so there was an
Speaker 1: internal document that the mortgage department created called Zippy Tips
Speaker 1: and Tricks, and it was all the ways you could
Speaker 1: tweak the inputs to make sure that Zippy would approve it.
Speaker 1: UM and a local I forgot which one it was.
Speaker 1: It was a local not as big as the l A. Times,
Speaker 1: but not the East Podunk Express. It was somewhere in between.
Speaker 1: Wrote a story about Zippy tricks and tips, and you know,
Speaker 1: the company had the exact same answer that Wells Fargo did. Listen,
Speaker 1: this isn't representative of how we do it. Zippy was
Speaker 1: set up and it's very effective here in two thousand
Speaker 1: and six and mortgages are just fine. But it's amazing
Speaker 1: how people's capacity to rationalize what's in their own self interest.
Speaker 1: And back back to your point, it's actually amazing how
Speaker 1: we don't see what we don't want to see, especially
Speaker 1: when our salary, to paraphrase up to in Sinclair is
Speaker 1: based on not seeing are when your political ideology is
Speaker 1: based on not seeing it. Per little conversation on Twitter
Speaker 1: the other day, um well, I just found it am
Speaker 1: using that somebody was man splaining gender neutral pronouns to you.
Speaker 1: It there is some kind of irony there. Some people
Speaker 1: are ironing impaired, especially online. It doesn't come across well.
Speaker 1: I got into a war of words on this with
Speaker 1: somebody on Twitter once and it was over Larry Summers
Speaker 1: and his comments about women in math. And I actually
Speaker 1: defended Summers. Really, yes, I have a great Summers and
Speaker 1: the anyway, this this exchange ended with the guy lecturing
Speaker 1: me about why I was wrong to defend Larry Summers,
Speaker 1: and I thought this is just the height of irony.
Speaker 1: Listen here, a little lady, let me explain to you
Speaker 1: about how women are. Let me let me explain to
Speaker 1: you why you should be so offended. You don't obviously
Speaker 1: don't understand what you're talking about. So let me explain
Speaker 1: to you why you should be so offended that Larry
Speaker 1: Summer said women didn't understand what they were talking about.
Speaker 1: It was very funny. You do you remember the column
Speaker 1: and the Boston Globe that just shredded the Harvard Endowment.
Speaker 1: It it basically this it won all sorts of awards.
Speaker 1: Not the writer, the editor on it went on to
Speaker 1: do the article that revealed all of the priest abuse
Speaker 1: in Boston. So it was that so everyone involved in
Speaker 1: this article absolutely stroling reputation. I merely linked into it
Speaker 1: in a column and got a furious phone call from
Speaker 1: Summers about it, and I asked him about it, and
Speaker 1: his answer struck me as so disingenuous. I tracked that
Speaker 1: report down, called her and basically she gave me, no,
Speaker 1: that's not true. No. I called him a dozen times. No,
Speaker 1: he said he was too busy saving the world to
Speaker 1: pay attention to to this. I was. I was just
Speaker 1: so every time somebody defends Larry Summers, in the back
Speaker 1: of my head, I just think, yeah, right, and he's
Speaker 1: a very public intellectual, and I just decided I'm not
Speaker 1: going to write about him, and I probably shoudn't even
Speaker 1: talk about him anymore, but you brought it up, so
Speaker 1: I had to, um, what else? What else are you
Speaker 1: looking at these days that interest you? What? What's the
Speaker 1: next mini book going to be? Well? Something that got
Speaker 1: my attention in this book. So, part of what is
Speaker 1: keeping the chain of financing for fracking going is pension
Speaker 1: fund money. Because in this era of super low interest rates,
Speaker 1: it isn't just that fracking companies can raise debt and
Speaker 1: have low interest expense given where interest rates are. It's
Speaker 1: also that, in this world of very low returns elsewhere,
Speaker 1: particularly in fixed income securities, a lot of pension funds
Speaker 1: have been putting money in private equity firms. Private equity
Speaker 1: in turn, has the highest allocation to the energy sector
Speaker 1: than they've had in like twenty years. They're shuttling billions
Speaker 1: of dollars into fracking, into shale companies, and that's part
Speaker 1: of what's keeping the Okay, this is an overstatement, but
Speaker 1: the daisy chain of money of money going, and so
Speaker 1: thinking about this issue and the low returns of pension
Speaker 1: funds um and given that I live in Chicago, which
Speaker 1: has massive problems, as does the state of Illinois. Has
Speaker 1: made me really interested in coming up with a way
Speaker 1: to explore this. So what's fascinating to me is the
Speaker 1: pension side of things. They have moved very heavily into
Speaker 1: hedge funds and private equity because, for some reason, at
Speaker 1: least on the hedge fund it's unexplained, there's a higher
Speaker 1: expected return for private equity um than there is for
Speaker 1: stocks and buns. I don't know why there's a higher
Speaker 1: expected return for hedge funds given their terrible performance over
Speaker 1: the past ten years. Somebody else was it? Simon Lack
Speaker 1: said the financial crisis wiped out all the gains of
Speaker 1: the entire hedge fund industry for the prior twenty years.
Speaker 1: That is a stunning That is a stunning anyway. But
Speaker 1: I don't know what I'll end up That's that's a
Speaker 1: that's a really interesting figure. I don't know what I'll
Speaker 1: end up doing with this. Because of Fannie and Freddie
Speaker 1: were an un sexy subject. I think pensions might be
Speaker 1: one step worse. So I'm going to tell you the
Speaker 1: problem with Fannie and Freddie are all the crazy anti
Speaker 1: GSC people. It adds, it injects the level of insanity
Speaker 1: to it that makes it tedious. But if you look
Speaker 1: at let me man explain to you what your next bush.
Speaker 1: If you I appreciate all ideas, whether they come from
Speaker 1: men or otherwise. If you look at Charlie Ellis's book
Speaker 1: on the retirement crisis send his and and Jack Bogel,
Speaker 1: there have been you know, these are legendary folks writing
Speaker 1: people aren't saving enough. The other side of that issue,
Speaker 1: I'm gonna I'm not gonna give you another idea and
Speaker 1: encourage you to do that idea, the idea that pension
Speaker 1: funds are highly leveraged, highly exposed to alternatives, are looking
Speaker 1: for a much greater return than we should perhaps reasonably
Speaker 1: expect given current valuations. That's setting itself up for a
Speaker 1: disaster down the road. That to me, maybe I'm wonky,
Speaker 1: but that's fascinating stuff. I think it's fascinating too. I
Speaker 1: think it's fascinating to it. Just there are these words that,
Speaker 1: for whatever reason, just lack intrinsic appeal. Pension is one
Speaker 1: of those words. Mortgage is actually another word Fannie and Freddie.
Speaker 1: It's like that it's subprime. Sub Prime was kind of fascinating.
Speaker 1: It got to be fascinating after it caused the financial crisis.
Speaker 1: But I think part of the reason that it didn't
Speaker 1: that that that nobody saw it coming was because mortgages,
Speaker 1: some prime mortgages. I mean, I don't know. It's like
Speaker 1: eat your spinach. It's just such an unappealing concept to
Speaker 1: think about. Agree to disagree. Um, do you, by the way,
Speaker 1: do you find it? I just was talking to a
Speaker 1: couple of other people about this recently. Do you find
Speaker 1: it a slog or do you enjoy doing the circuit
Speaker 1: if it's a reasonable period of time, So I'd say
Speaker 1: I'd say it's a mixture. I'm always happy when anybody
Speaker 1: wants to talk to me about something I've written, because
Speaker 1: it means it resonated somewhere, So I'm grateful for any
Speaker 1: attention it it gets. I'd say I have less of
Speaker 1: a worry of a slog than I always have when
Speaker 1: I've published something. My predominant emotion isn't excitement and look
Speaker 1: at me. It's fear that I've gotten something wrong, that
Speaker 1: I've made a mistake somewhere. It's um and it's and
Speaker 1: it's sort of agony in within me because I always
Speaker 1: see the ways in which it could have been better.
Speaker 1: After it's too late to do anything. It's never done though,
Speaker 1: Isn't that true for anything you write that you could
Speaker 1: always there's always another draft waiting time you can. Books
Speaker 1: are pretty set in stone at a certain point. Um.
Speaker 1: And so that's so I have trouble being as enthusiastic
Speaker 1: and excited as I as I should be, because my
Speaker 1: my initial reaction isn't look at me, it's let me dock.
Speaker 1: So you're you're expecting to be told you were wrong.
Speaker 1: You know what I already have then, I mean, I
Speaker 1: did this op ed for the New York Times, um,
Speaker 1: and they put a pretty incendiary headline that was that
Speaker 1: headline had nothing, it did not um and I got
Speaker 1: the next financial crisis looks underground. I got a lot
Speaker 1: of flaming on Twitter for that. So for the record,
Speaker 1: can I inform listeners that writers don't get to write
Speaker 1: their own headlines. It's the editors who write that. The
Speaker 1: Times actually has a policy of not allowing people to
Speaker 1: look everywhere. Yeah it's and it's and it's fine. Actually
Speaker 1: there the headline they put on it got attention. And
Speaker 1: in today's world where everything is drowned out by by
Speaker 1: news of Trump. You know what, I I'm not going
Speaker 1: to complain, all right, that that's fair enough. So so
Speaker 1: let's some let's jump into our speed round. These are
Speaker 1: the ten questions I ask everybody, and we'll we'll plow
Speaker 1: through them. Tell us the most important thing people don't
Speaker 1: know about your background? M hmm. Let's see. I guess
Speaker 1: it's probably that I grew up in a mining town
Speaker 1: called Hibbing, which is in northern Minnesota. And if you
Speaker 1: know it, it's probably because you're a Bob Dylan fan,
Speaker 1: because that's where Bob's Emmerman also grew up. And Hibbing
Speaker 1: has the two distinctions of being often the coldest spot
Speaker 1: in the United States and of having the world's largest
Speaker 1: pit open eye, world's largest open pit iron ore mine interesting.
Speaker 1: Tell us about some of your early mentors who helped
Speaker 1: you along with your career. Let's see. So I had
Speaker 1: two great teachers in high school who were brothers, Dan
Speaker 1: and Matt bergen Um. Dan was English teacher and Matt
Speaker 1: was a math teacher. And Dan taught me to write,
Speaker 1: and Matt made me believe that I was far better
Speaker 1: at math than I actually am, enough so that I
Speaker 1: managed to get through a college major UM in it,
Speaker 1: and then I guess that Fortune. I think the real,
Speaker 1: the real mentor I had was was really Jonah Sarah
Speaker 1: who UM, who really helped me learn how to tell
Speaker 1: a story? UM? When I got to Fortune, the knock
Speaker 1: on me was, she's debatably smart, but totally unable to write.
Speaker 1: And I like to blame my perfect tire. Maybe she's
Speaker 1: smart but hard. I was a fact checker from my
Speaker 1: initial years. I was really good at checking facts. It
Speaker 1: was fine. But if if I've learned to write at all,
Speaker 1: it's probably because of Joe Well. I have to tell
Speaker 1: you you clearly have learned to write, and and I
Speaker 1: really enjoyed Uh America. UM. Who influenced your approach to
Speaker 1: investigative journalism? UM? I would say probably. I learned the
Speaker 1: most from Peter el Kind, who was the my co
Speaker 1: author and smartest guys in the room. When I began
Speaker 1: to work with Peter, I thought I was going to
Speaker 1: learn the shortcuts for doing this, and I quickly learned
Speaker 1: there are no shortcuts. You talked to everybody, You call everybody,
Speaker 1: You call them back. If they don't call you, you back.
Speaker 1: You read every document, you go through the footnotes, of
Speaker 1: every document, but you leave no stone unturned, and you
Speaker 1: go down a lot of rabbit holes because you never
Speaker 1: know if at the bottom of the rabbit hole you're
Speaker 1: going to find something that becomes the threat of your book.
Speaker 1: Are just sort of a vast black hole, and you
Speaker 1: find a lot of the vast black holes. But but
Speaker 1: I think Peter Peter made me realize that it's just
Speaker 1: work in persistence. Tell us about some of your favorite books,
Speaker 1: be they fiction, non fiction, fraud related, or something else.
Speaker 1: So my list is always changing, but i'd say right now,
Speaker 1: the books I've been thinking about a lot our Team
Speaker 1: of Rivals by Doris Karns Goodwin. And the reason I
Speaker 1: think about that book a lot is that it took
Speaker 1: a well known period and look through a different lens,
Speaker 1: you know, through the lens of these rivals, who nonetheless
Speaker 1: became an incredibly effective cabinet. And I love that Lincoln Lincoln,
Speaker 1: and I love that that that is a sort of
Speaker 1: lesson for writing about how you can take something that's
Speaker 1: well known and see it through a different slant and
Speaker 1: make people learn and understand it in a in a
Speaker 1: whole different way. It doesn't have to be this fresh
Speaker 1: thing that nobody has ever heard of before, you know,
Speaker 1: Abraham Lincoln's presidency. But but but I love that. I
Speaker 1: think that's very instructive. And then my favorite fiction book
Speaker 1: of late was a book called Homegoing U Homegoing, which
Speaker 1: is about um, two sisters born in Africa, one stays there,
Speaker 1: one is taken away as a slave in the United States,
Speaker 1: and about It's about the different trajectories of these two um,
Speaker 1: these two families. And I'd say the reason I liked
Speaker 1: it so much is that it's a book that kind
Speaker 1: of excavates your own still still deeply held prejudices, and
Speaker 1: we all have some of them, and it's a book
Speaker 1: that really changes minds and souls, I think on a
Speaker 1: very deep level. That's two. You have a third one.
Speaker 1: What's the last thing? You God, I've been rereading because
Speaker 1: my kids are reading it. And I will always love
Speaker 1: Lord of the Rings just for the sheer scope, the
Speaker 1: sheer scope of Tolkien's imagination. And even though I know,
Speaker 1: and this whole conversation has been about how good and
Speaker 1: bad aren't always so simple, man, is there something so
Speaker 1: satisfying about a world where good as good and bad
Speaker 1: as bad? That's right. Starting with the hobbit and then
Speaker 1: straight straight Absolutely. As a kid, I used to reread
Speaker 1: those over the summer, and then at a certain age
Speaker 1: you kind of say, all right, I have to stop
Speaker 1: doing this, But they were fine. I just started again.
Speaker 1: It's never too late. How older you kids, I've got
Speaker 1: a nine year old and a six year old. So
Speaker 1: let me let me jump ahead and ask a different question. Um,
Speaker 1: what do you do for fun out of the office? Oh? Fun?
Speaker 1: What do you do to stay mentally or physically fit? So,
Speaker 1: so I read a lot. I'm a big yoga person,
Speaker 1: and I've done a kind of yoga called the Shtunga,
Speaker 1: which is which is a self practice for one years now,
Speaker 1: so I usually pretty ripped. So I usually because I
Speaker 1: work at home, I usually just do my stronger practice
Speaker 1: at home. And you've been doing that for twenty years.
Speaker 1: So what has changed since you became a writer? What
Speaker 1: do you think is the biggest difference these days? Oh?
Speaker 1: So much. I mean that the whole firmament has changed.
Speaker 1: You know. It used to be that if you were
Speaker 1: going to be a writer, well then you worked at
Speaker 1: a magazine and you were a journalist. And now some
Speaker 1: of the best, most interesting writing comes from people who
Speaker 1: aren't journalists, who are publishing on blogs and and elsewhere.
Speaker 1: So in some ways it's incredibly freeing and that you
Speaker 1: don't have to be a full time journalist to get
Speaker 1: hurt and to to to be to be a journalist. Um,
Speaker 1: but it's of course the other changes in the business
Speaker 1: have just undermined the whole financial foundation of journalism, and
Speaker 1: so it's it's really different. If you could have told
Speaker 1: me when I started working at Time Inc. Back in
Speaker 1: Time Inc. Was in the time built in life building
Speaker 1: and Rockefeller say enter that Time would be long gone
Speaker 1: from there and the magazines would be being sold piecemeal.
Speaker 1: I would never have believed that what are these blogs
Speaker 1: you refer to? What I mean yours? You know, people
Speaker 1: people people, people are really smart, great things to say,
Speaker 1: and are really good writers. Don't have to be writing
Speaker 1: for Fortune magazine. Now, that's reason. And I wasn't fishing
Speaker 1: for anything there. I just that's a good thing about
Speaker 1: tell us what you're really excited about in the world
Speaker 1: of journalism or books were writing? Well, I guess when
Speaker 1: everything is getting ripped apart, comes opportunity, right, And so
Speaker 1: the world of journalism is getting ripped apart, right, right now,
Speaker 1: and it's it's not getting any better. But out of that,
Speaker 1: I think comes new opportunities for storytelling, whether it's these
Speaker 1: little books that Columbia is doing, like Saudi America, whether
Speaker 1: it's podcasts like like you're doing, but new opportunities to
Speaker 1: create content in ways that are relevant to people. And
Speaker 1: so it's still story telling at the end of the day,
Speaker 1: and communicating. And so I guess I'm trying to believe
Speaker 1: that where there's disruption, there's also opportunity. That's that's pretty fair.
Speaker 1: Tell us about a time you failed and what you
Speaker 1: learned from the experience. Oh so, let's see, I could
Speaker 1: do two of those. I really struggled through my math
Speaker 1: major in college. Math was easy, easy, easy from me
Speaker 1: until I hit the really upper level theoretical stuff where
Speaker 1: all of a sudden, it was like a black wall
Speaker 1: came down in front of my eyes. I would I
Speaker 1: would sit doing We would have these math exams that
Speaker 1: were forty take home exams, and they would be proofs
Speaker 1: and I would look at them and I wouldn't even
Speaker 1: be able to start, and I would hear people around
Speaker 1: me scratching away. They just had the insight, And I
Speaker 1: would say persevering through my math major was a really good,
Speaker 1: really good lesson um even though I mean I fought
Speaker 1: for a sea in one class. That's what I've never
Speaker 1: gotten to see in my life, learning learning that you're
Speaker 1: not very good at something, um um um. So that was.
Speaker 1: But I learned more from sticking through that than I
Speaker 1: did from all the things I was I was good at.
Speaker 1: And then I'd say I probably failed in my first job.
Speaker 1: I was a terrible analyst at Goldman. You were there
Speaker 1: for three years. For three years, I ended up, Um,
Speaker 1: I ended up sticking it out. But I think I learned.
Speaker 1: I learned a lot from that about importance to detail, detail,
Speaker 1: about committing to where you are instead of if you're
Speaker 1: going to be there at all, instead of having a
Speaker 1: bad don't half asset right um. If you're there, then
Speaker 1: just do it and and and and behave um Instead,
Speaker 1: Why were you were you misbehaving at Goldman in terms
Speaker 1: of I mean, in terms of the work I think
Speaker 1: I acted. I think I acted like I didn't want
Speaker 1: to be there, I think, And it took them three
Speaker 1: years to pick that up. I thought they're the smartest guy.
Speaker 1: I pulled it together after after my first year. But um,
Speaker 1: that was that was a lesson to me because failing
Speaker 1: in your first job is a hard is a hard thing.
Speaker 1: When you get very negative feedback from people, yeah, it
Speaker 1: crushes your confidence. So I would imagine, Um, so if
Speaker 1: a millennial came up to you or recent college grad
Speaker 1: said they're thinking about becoming a film in the blank writer,
Speaker 1: book author, journalist, what sort of advice would you give them?
Speaker 1: I would tell them to start writing and to write
Speaker 1: a lot, because the only way you get to be
Speaker 1: a better writer is by writing a lot. And you
Speaker 1: can get to be a better writer, you have to
Speaker 1: have some innate skill at it, I guess, but you
Speaker 1: can learn, and you will learn. It's a craft. And
Speaker 1: that's why people call writing a craft, because a craft
Speaker 1: is something that you can get better at. You can
Speaker 1: get better, and so I think that's the most important one.
Speaker 1: But I would say also that, especially given how uncertain
Speaker 1: financially this life is right now, um, that you have
Speaker 1: to really really be deeply curious and not be able
Speaker 1: to rest unless you've explored your curiosity, because that's the
Speaker 1: thing that makes it makes it worth doing right to me,
Speaker 1: wonky as it may be, but getting to spend a
Speaker 1: year thinking about Aubrey McClendon and fracking. I was deeply
Speaker 1: curious about this, and I would not have been able
Speaker 1: to rest if I hadn't eventually done something about that.
Speaker 1: And that's what makes it all worthwhile to me. Sometimes
Speaker 1: you have an introducer, and I think if you don't
Speaker 1: have that, if you're more practically minded in some ways,
Speaker 1: that maybe this isn't especially right now, the right the
Speaker 1: right place. So you're a little obsessive about the topics
Speaker 1: you cover, do you do you impart that on on
Speaker 1: the college grads and say you have to be all
Speaker 1: in or what? Because that that's similar to the failure
Speaker 1: answer as well. I say you have to be all
Speaker 1: in because otherwise you won't make that additional phone call.
Speaker 1: You won't. You'll do what you have to do or
Speaker 1: what you think you have to do, but you won't
Speaker 1: pursue that loose, dangling end that may may end up
Speaker 1: becoming the most important piece of information that that that
Speaker 1: you got. And so you have to be just really
Speaker 1: really deeply passionate, passionately curious, quite fascinating. And our final question,
Speaker 1: would you know today about writing and investigative journalism and
Speaker 1: book authoring that you wish you knew back in when
Speaker 1: you first started twenty plus years ago. I think what
Speaker 1: I wish I had known about writing is that being
Speaker 1: a good student isn't always helpful. And what I mean
Speaker 1: by that is that when you're a good student, you
Speaker 1: think you have to show everybody everything that you've learned,
Speaker 1: because God forbid, the teacher thinks you didn't you miss
Speaker 1: this little nuance, right, So you're gonna throw everything at
Speaker 1: the reader in order to show them that you've mastered this.
Speaker 1: And I think it's actually sometimes hard for good students
Speaker 1: to be good writers because you need to let go
Speaker 1: of that. You need to learn to tell a story,
Speaker 1: and you need to step back from all of your facts.
Speaker 1: Somebody said to me once that facts are like lights
Speaker 1: on a Christmas tree. You actually can have too many, um,
Speaker 1: and I thought that was a great, a great line.
Speaker 1: And you need to tell a story that communicates with people,
Speaker 1: not try to impress people by how much with how
Speaker 1: much you know. Quite interesting. We have been speaking with
Speaker 1: Bethany McClaine. She is the author of Saudi America, as
Speaker 1: well as Smartest Guys in the Room and numerous other books.
Speaker 1: If you enjoyed this conversation, we'll be showing look up
Speaker 1: an inch or down an Inch on Apple iTunes, and
Speaker 1: you could see any of the other two hundred plus
Speaker 1: interviews we've recorded. You can find that on Apple iTunes, Stitcher, overcast,
Speaker 1: Bloomberg dot com, wherever final podcasts are sold. We love
Speaker 1: your comments, feedback and suggestions right to us at m
Speaker 1: IB podcast at Bloomberg dot net. I would be remiss
Speaker 1: if I did not thank the crack staff who helps
Speaker 1: put together these conversations each week. Attica val Bron is
Speaker 1: our project manager, Medina Parwana is our audio engineer. Slash
Speaker 1: producer Taylor Riggs is our booker producer. Michael bat Nick
Speaker 1: is our head of research. I'm Barry Ritolts. You've been
Speaker 1: listening to Masters and Business on Bloomberg Radio p