Speaker 1: This is Master's in Business with Barry Ridholts on Bloomberg Radio.
Speaker 1: This week on the podcast, I have an extra special guest.
Speaker 1: His name is Jim Milstein, and he has a fascinating history, uh,
Speaker 1: not just in the worlds of corporate restructuring, but related
Speaker 1: to the financial crisis and the restructuring of A I
Speaker 1: G and a variety of other um debacles. He's had
Speaker 1: a front row seat to. Uh. If you are at
Speaker 1: all a student of how companies go bad and what
Speaker 1: we do with them afterwards, you're going to find this
Speaker 1: to be an absolutely fascinating conversation. He has a deep
Speaker 1: expertise in this space, starting out at Cleary Gottlieb, going
Speaker 1: to Lazard Frere's, launching his own firm, Milstein and Company,
Speaker 1: which was recently purchased by Guggenheim Securities, and Dead Center
Speaker 1: in the middle of that being the chief restructuring officer
Speaker 1: at the Treasury Department, in the middle of the bailouts
Speaker 1: um oh nine ten eleven. So I found this to
Speaker 1: be an absolutely intriguing conversation, and I suspect you will
Speaker 1: as well. With no further ado my conversation with Jim Milstein,
Speaker 1: I'm Barry Ridholts. You're listening to Master's in Business on
Speaker 1: Bloomberg Radio. My special guest this week is Jim Milstein.
Speaker 1: He is the co chairman of Guggenheim's Securities Uh. He
Speaker 1: comes to us with a bachelor's from Princeton a master's
Speaker 1: from Berkeley. He graduated with a degree in law from Columbia.
Speaker 1: Currently he's an adjunct professor at Georgetown University Law Center.
Speaker 1: But perhaps most interesting for our purposes, he was the
Speaker 1: Chief Restructuring Officer at Treasury from two thousand nine to
Speaker 1: two thousand eleven, responsible for oversight and management of Uncle
Speaker 1: Sam's la just financial sector rescues. Indeed, he was the
Speaker 1: principal architect of the restructuring of American International Group. Jim Milstein,
Speaker 1: Welcome to Bloomberg. Great to be here. Thanks. So you
Speaker 1: have a fascinating background. You begin your career as a
Speaker 1: lawyer at Cleary Gottlieb. What did you imagine your career
Speaker 1: was gonna look like when you first started as an attorney. Well,
Speaker 1: like many attorneys, I kind of wandered into my first
Speaker 1: job without a real clear vision of what I was
Speaker 1: gonna do. But um, you know, Reagan had gotten elected.
Speaker 1: I had spent a couple of years out of Berkeley
Speaker 1: being a policy analyst and working on what was then
Speaker 1: called industrial policy, which was something that the United States
Speaker 1: probably implements only through the Defense Department UH and UM,
Speaker 1: but we had been part of a small group of
Speaker 1: scholars who were trying to urge the United States to
Speaker 1: deal with the then Japanese threat to our electronics and
Speaker 1: semiconductor and steele an automobile industry is by actually coordinating tariff, trade, tax,
Speaker 1: and investment policy the way Trump is doing that. Well yeah,
Speaker 1: maybe not quite not so coordinated. Yeah, but the basic
Speaker 1: premises we should be proactive here. Yeah, well, you know
Speaker 1: other countries are right. We were dealing with the mercantist
Speaker 1: nation in Japan, really Germany the same after World War Two.
Speaker 1: China is obviously now engaged in the signal signs of yeah,
Speaker 1: the same kinds of behavior. But they've all learned from
Speaker 1: each other. You know, the Koreans learned from the Japanese,
Speaker 1: the Chinese learned from both of them, and they have
Speaker 1: a coordinated policy of credit, investment, tax, trade, UH in
Speaker 1: order to promote domestic employment and production. And you know,
Speaker 1: the United States, we've taken a more free market hands off.
Speaker 1: Le's a fair approach, and you can see the consequences now,
Speaker 1: um as we find ourselves in a much more competitive environment. Anyway,
Speaker 1: low story short spent a lot of a couple of
Speaker 1: years working on those kinds of issues. Reagan gets elected,
Speaker 1: we're now in the You know, Reagan Thatcher dismantle the
Speaker 1: welfare state. UH, industrial policy is probably the never going
Speaker 1: to be on that agenda. So I determined, instead of
Speaker 1: going back to Washington and working in the government, I'm
Speaker 1: gonna work for a liberal international law firm, Cleary Gottlieb
Speaker 1: that helped create the predecessor to the European Union after
Speaker 1: World War Two. A group of it was founded by
Speaker 1: a group of State Department UM officials in Paris and
Speaker 1: Washington simultaneously, and they helped create the Iron and Steel Union,
Speaker 1: which was the precursor of the EU. So how do
Speaker 1: you transition from Cleary Gottlieb to Lezard Freres. That doesn't
Speaker 1: seem like a natural path. Well, I had been working
Speaker 1: on the Lazard and clearly shared a client called Pan
Speaker 1: American Airways, which was the dominant international carrier in the fifties,
Speaker 1: sixties and seventies and inside PanAm and disappeared into the
Speaker 1: dustbin of history. But in the fifties, sixties, seventies, and
Speaker 1: eighties it was the dominant international carrier for the United States.
Speaker 1: It fell on hard times as markets were deregulated and
Speaker 1: they found themselves uh subject to competition they really couldn't
Speaker 1: handle because they were a product of a regulated industry,
Speaker 1: and they ultimately went bankrupt. Blazard and Cleary shared it.
Speaker 1: It was my first big debtor case as a lawyer,
Speaker 1: running in effect and orderly liquidation of Panama, selling its
Speaker 1: roots off to United and to American and hither and
Speaker 1: yon and uh. And at the end of the case,
Speaker 1: Felix wrote and called me and said during the wrong
Speaker 1: business she really should be a banker. And I resisted
Speaker 1: then that was like nine two or nine. I resisted
Speaker 1: changing my career then. But in nineteen nine they came
Speaker 1: calling again. And after I was working on a large
Speaker 1: restructuring in Korea called day Wu. They had giant company
Speaker 1: they again one of the one of the Korean kiddets.
Speaker 1: So their version UH and you know, trading company of
Speaker 1: steel company, electronics company, textile company, finance, real estate. The
Speaker 1: whole nine yards ten percent of the Korean economy and
Speaker 1: one company under one roof what could go wrong with that?
Speaker 1: What can go wrong with that? And they borrowed sixty
Speaker 1: billion dollars and all over God's Green Earth, and you know,
Speaker 1: fell on hard times as a result of the Tai
Speaker 1: Bak crisis, which became the Korean law crisis in the
Speaker 1: late nineties, and so they hired, They hired clearly, and
Speaker 1: then I was in charge of that, and I hired
Speaker 1: Lizard to help me with it because they had restructuring
Speaker 1: and they had presence all over God's Green Earth where
Speaker 1: we had to restructure various debts. So I got to
Speaker 1: know the guys running that practice very well. At the
Speaker 1: end of it, they leaned over across the aisle from
Speaker 1: some god awful flight from Tokyo to New York and said,
Speaker 1: you know, you're in the wrong business. And I said,
Speaker 1: I've heard this, so this time I succumbed to the
Speaker 1: the offer. So you're there from two thousand to two
Speaker 1: thousand eight, and we had a couple of little things
Speaker 1: happened in oh eight. How did you go from Lazard
Speaker 1: to incorporate restructuring to working with Uncle Sam, who was
Speaker 1: a little concerned about Lehman and a I G and
Speaker 1: everything else. So I answered, the phone is basically the
Speaker 1: is basically the answer to that. I had a you know,
Speaker 1: it's funny how the world works. I had a friend,
Speaker 1: a guy had worked with when he was a young,
Speaker 1: UH policy analyst in the Carter administration, when I was
Speaker 1: a young whipper snapper lawyer. Well now, when I was,
Speaker 1: you know, graduate student at a Berkeley and I was
Speaker 1: writing things on industrial policy, and he was reading them
Speaker 1: and helping promote them across the Carter administration. And uh, anyway,
Speaker 1: I picked up, you know, shortly after the election, like
Speaker 1: ten minutes after the election of President in Obama, then
Speaker 1: to be President Obama. I got a call from him
Speaker 1: and he said, you might have noticed we're doing a
Speaker 1: couple of restructurings down here. The admitted the new administration
Speaker 1: could use someone with your background. Would you be willing
Speaker 1: to come? And you know, I've always had an interest
Speaker 1: and who would have believed that the country needed my
Speaker 1: expertise in particular, but there it was quite quite fascinating.
Speaker 1: So you mentioned you got a phone call. What made
Speaker 1: you decide to take what sounded like a pretty thankless
Speaker 1: role well that's you know, that's what I do for
Speaker 1: a living, pretty thankless roles. But um, you know, I
Speaker 1: think the I thought I might be able to make
Speaker 1: a modest contribution given my background and uh and I
Speaker 1: had been, you know, a student of the financial crisis
Speaker 1: as it was unfolding. We at Lazard, you know, we're
Speaker 1: running the leading restructuring practice. We had a lot of
Speaker 1: these the front end of the subprime crisis running and
Speaker 1: you know coming through our doors America mortgage companies, originators
Speaker 1: and distributors coming through. I mean the you know, they
Speaker 1: were the first to fail, right at the front end
Speaker 1: of the system, with the first to fail, and that
Speaker 1: was enough seven Uh. And you know, I'm a curious fellow,
Speaker 1: and I was. There was a plethora of these companies
Speaker 1: coming in. It was like what's going on. There was
Speaker 1: a website called mortgage implode dot com and it tracked
Speaker 1: something like four hundred of them, but it would track
Speaker 1: it in real time and kept a running list. It
Speaker 1: was quite astonishing. And some of the biggest ones, you know,
Speaker 1: new century American home mortgage showed up at our doors
Speaker 1: as our clients. We were you know, presided over and
Speaker 1: helped them liquidate themselves in effect, and uh so, I
Speaker 1: you know, my antenna went up. I got smart about
Speaker 1: the subprime crisis and the leveraging of the financial system
Speaker 1: and how they were levering themselves around these products and others. Um.
Speaker 1: So when this call came, you know, having become a
Speaker 1: student of what had gone on in the American financial
Speaker 1: industry between two thousand and two thousand eight, um, you know,
Speaker 1: with my curiosity alone drove me to Washington. So so
Speaker 1: the news crosses, A I G gets a hundred and
Speaker 1: eighty two billion dollar bail out. What's your immediate response
Speaker 1: when you see these These are hard We're kind of
Speaker 1: used to them today, but at the time, these numbers
Speaker 1: were just unfathomable. Yeah. I mean by the time I
Speaker 1: got there, Um, A I G had already um borrowed
Speaker 1: from the Fed in one pocket or another a hundred
Speaker 1: and thirty two billion dollars. So that was in over
Speaker 1: the course of eight weeks between September eighteenth, when the
Speaker 1: first loan was initially in was inked, to the time,
Speaker 1: you know, the transition team was in place and we
Speaker 1: were now trying to figure out what we're going on. Um,
Speaker 1: they had borrowed a hundred and thirty two billion dollars,
Speaker 1: and that's when you know the restructuring first began. Right
Speaker 1: that the in in most cases with the exceptional demon brothers,
Speaker 1: what the federal government, the FED, the Treasury, and the
Speaker 1: fdi C did during the um course of two thousand
Speaker 1: eight was just refinance the balance sheets, the short term
Speaker 1: debt coming due on the balance sheets of all of
Speaker 1: these companies, basically saying, these companies are effectively solvent, but
Speaker 1: they have a very short term liquidity issue and if
Speaker 1: we could free that up, well, these are companies worth
Speaker 1: worth saving and if they crash it causes a big
Speaker 1: problem otherwise well, and insalvency expert would say, they're two
Speaker 1: definitions in its solvency. There's a balance sheet in solvency
Speaker 1: where your liabilities exceedure fair market value of your assets,
Speaker 1: and then there's illiquidity. You're an inability to pay your
Speaker 1: debts win due. It was clear at the time that
Speaker 1: none of these companies could pay their debts win due.
Speaker 1: They needed, in effect what the FED was established to do,
Speaker 1: to be a lender of last resort, an emergency provider
Speaker 1: of liquidity when the markets freeze up. In their panics,
Speaker 1: and the FED and the fdi C and the Treasury
Speaker 1: Department did this to a fairly well during the Bush
Speaker 1: administration under the leadership of Secretary Paulson and Ben Bernanky
Speaker 1: at the FED. UM. So by the time we get there,
Speaker 1: uh in you know later, oh ay, we haven't yet
Speaker 1: assumed the powers. But there's a transition going on, a
Speaker 1: baton passing exercise going on between the Pauls and Treasury
Speaker 1: Department and the guid Treasury Department UM, and those guys
Speaker 1: had worked together previously, so it wasn't like they were strangers.
Speaker 1: Was at the president of the New York FED. So
Speaker 1: everybody kind of knew each Yeah, no, no, that there
Speaker 1: was a very seamless transition. And you know, sometimes you
Speaker 1: get lucky as a country. Right, we have the leading
Speaker 1: economic historian of the Great Depression saying, as the chairman
Speaker 1: of the Federal Reserve, he may not have had a
Speaker 1: playbook as to what to do, but he knew what
Speaker 1: the FED did wrong in the thirties and he was
Speaker 1: dedicated not to doing that again. Hey, learning what not
Speaker 1: to do was half the battle and put your way
Speaker 1: ahead of people. So so you mentioned the difference between
Speaker 1: the liquidity event and a solvency event. And you mentioned
Speaker 1: in passing Lehman Brothers. Let's talk about that a second.
Speaker 1: There have been some academic studies that said, at the
Speaker 1: time Lehman Brothers went belly up, their value was somewhere
Speaker 1: between a negative hundred billion dollars and negative two billion dollars.
Speaker 1: Of all the companies out there, they really seem to
Speaker 1: be completely insolvent. Fair statement. Well, so if you took
Speaker 1: a snapshot, I would venture to say, if you took
Speaker 1: a snapshot and mark to market the balance sheets of
Speaker 1: any of the major financial institutions, particularly the broker dealers Goldman, Morgan, Stanley,
Speaker 1: Meryl Lynch Ah on September one, maybe make it September ninth,
Speaker 1: the day after Fanny and Freddie are taken into conservatorship,
Speaker 1: and panic runs through the entire conventional and subprime already
Speaker 1: run through the subprime market, but now you take the
Speaker 1: largest mortgage so can exactly and you put them in
Speaker 1: a conservationship on the on the theory that either they're
Speaker 1: illiquid and need the government support, or they're insolvent and
Speaker 1: need the government's balance sheet to back them. Ah, if
Speaker 1: you took a snapshot of the balance sheets of any
Speaker 1: of the major financial institutions in the the United States on
Speaker 1: September nine, and said, mark this all to market right now,
Speaker 1: where anything is trading, I dare say in a balance
Speaker 1: sheet basis, they'd all look and solvent. But and that
Speaker 1: was sort of the thing is, there's a relationship between
Speaker 1: your ability to maintain a position and your solvency. So,
Speaker 1: you know, Kaine's famously said, the markets can stay irrational
Speaker 1: longer than you can stay solvent. But if you can
Speaker 1: stay solvent that is liquid, through a downturn, you're okay.
Speaker 1: And so in fact better come out the other side
Speaker 1: actually pretty good. So in the case of Lehman, right,
Speaker 1: so you have Lehman Weekend. You know this story has
Speaker 1: been told many times, but the FED, at the New
Speaker 1: York Fed, they're trying to figure out if they can
Speaker 1: broke her a marriage between Lehman and Barkley's or Lehman
Speaker 1: and Bank of America, and each of those institutions prospective
Speaker 1: buyers is doing diligence as fast as they can on
Speaker 1: Lehman's book to try and figure out which part of
Speaker 1: the bank, if maybe the entire part of the bank,
Speaker 1: they will take and um. In particular, b of A
Speaker 1: has done as good a job as could be done
Speaker 1: in the circumstances and analysis of Lehman's real estate portfolio,
Speaker 1: and they conclude that the marks that the that the
Speaker 1: last marks on the portfolio vastly overstate the value fabricated
Speaker 1: completely fabricaly well, who knows where there's fabricator? The market
Speaker 1: was can collapse if you could have held onto it,
Speaker 1: So who knows? So lets let me share my pet peeves,
Speaker 1: which is the will will hold aside the fast by
Speaker 1: rule change that no longer required mark to market. Will
Speaker 1: discuss that later. But the REPO one oh five. If
Speaker 1: if you have to every quarter a few days before
Speaker 1: you report your earnings and you have to square up
Speaker 1: your quarterly numbers, you have to move fifty plus billion
Speaker 1: dollars of liability off your balance sheet, that kind of
Speaker 1: implies that not only is your accounting not somewhat opaque,
Speaker 1: but it implies that you were committing accounting fraud on
Speaker 1: your investors. And you're probably either in bad shape or
Speaker 1: deeply insolvent. And we've since found that forget the market
Speaker 1: to market, they're deeply insolvent. Yeah, okay, so that was
Speaker 1: the conclusion the federal reached, and they concluded that they
Speaker 1: really didn't have a statutory based on which to be
Speaker 1: able to fund provide emergency lending to Lehman. Um. You know,
Speaker 1: I think in retrospect, given the fallout that immediately occurred
Speaker 1: upon the filing of that bankruptcy, maybe we should have
Speaker 1: been more creative. We could have foisted losses on the shareholders.
Speaker 1: We could have foisted right well that we had a bankruptcy. Um.
Speaker 1: You know, we could have achieved the kind of you know,
Speaker 1: anti moral hazard problem with bailouts potentially in the way
Speaker 1: we structured alone to the broker dealer so as to
Speaker 1: avoid the kind of adverse impacts that I mean that
Speaker 1: the filing of Lehman Brothers created a panic. Well, okay,
Speaker 1: I'm not going to disagree with that. And so you
Speaker 1: know that the whole the whole script of the rescue
Speaker 1: from you know, the beginning of with Bear Stearns to
Speaker 1: the opening of the f X lines to make sure
Speaker 1: that the European banks didn't default against their on their
Speaker 1: own debt and therefore default on their American counterparties, which
Speaker 1: would have created a liquid crisis here to the you know,
Speaker 1: putting a Fannie and Freddie into conservatorship, the saving of
Speaker 1: a I G. A series of emergency the alphabet soup
Speaker 1: of emergency lending programs, the Fed instituted um, you know,
Speaker 1: the prime dealer credit facility, the TALF, the TAFF, the
Speaker 1: you know, commercial paper facility. I mean, you know, there
Speaker 1: was every market that had frozen up. They intervened in
Speaker 1: and tried to restart in order to provide liquidity to
Speaker 1: the system. And so the question is, you know, in
Speaker 1: the midst of that just tsunami of credit support and liquidity,
Speaker 1: you decide to take one company down. My my pet
Speaker 1: thesis is Dick Fold said no to Warrn Buffett's offer
Speaker 1: to inject capital over the summer. And I wish I
Speaker 1: was a fly on the wall in that room, because
Speaker 1: I have to imagine between Paulson and BERNANKI and guys
Speaker 1: and there someone said this, This idiot said no to
Speaker 1: Warren Buffett. How can we possibly save him? They had
Speaker 1: an opportunity. He was a pig, He's always been a pig,
Speaker 1: and now he should be in an orange jumpsuit. But
Speaker 1: let's we're not automatons. Personalities and personal histories matter, and
Speaker 1: I So I don't think there's uh, I don't think
Speaker 1: you're crazy in that thought. So let's talk a little
Speaker 1: about what's going on currently in your career. Um, after
Speaker 1: you leave Treasury, you go to work as a bank
Speaker 1: run an investor, and you pretty much decided to hang
Speaker 1: out your own Shingle Millstein and Company. UM tell us
Speaker 1: about the launch of that firm and what the thinking
Speaker 1: was as opposed to being attached to another giant financial entity. Yeah,
Speaker 1: I mean, one thing working in the government cures you
Speaker 1: of is the desire to have a boss. So, UM,
Speaker 1: I decided I would set up my own shop. I
Speaker 1: really had no you know, grand plans, but um uh
Speaker 1: we went from you know, one answering one another call
Speaker 1: to another call to another column before I knew it.
Speaker 1: You know, I had offices in New York and Washington,
Speaker 1: and we were working on large corporate restructurings and sovereign
Speaker 1: restructurings again and uh and also you know, reinvesting the
Speaker 1: profits of the business. The partners, the guys who joined
Speaker 1: me and galleys and gals who joined me, you know,
Speaker 1: we all agreed that, uh, the advisory business is a
Speaker 1: business that goes up and down. The revenue is volatile,
Speaker 1: whereas if we could actually make some solid investments, we
Speaker 1: might be able to provide ourselves with a little more
Speaker 1: secure income in a manner and to generate wealth, particularly
Speaker 1: for the young kids who were working for me. So anyway,
Speaker 1: seven years into this, we ended up with thirty five
Speaker 1: people doing corporate and sovereign restructuring and you know, fifteen
Speaker 1: people doing investing. We had raised some third party funds. Uh.
Speaker 1: And you know, I'm not getting any younger. I'm sixty
Speaker 1: three years old. And the people who had joined me
Speaker 1: were all in their thirties and forties. And you know
Speaker 1: I turned to them and said, uh, we have a
Speaker 1: strategic problem. Uh. To strategic problems one where a small
Speaker 1: boutique entering what I think will be a tsunami of
Speaker 1: restructuring to come. Uh. And we really could use the
Speaker 1: leverage of a larger firm with you know, arms and
Speaker 1: legs in various industries with real industry expertise as opposed
Speaker 1: to our sort of products specialty UH called restructuring. On
Speaker 1: the one hand, and the other strategic challenge was, you know,
Speaker 1: We've built a franchise and and I'm not getting any younger.
Speaker 1: So eventually we concluded that merging with a larger financial
Speaker 1: services firm made sense. Alan Shortz and I had been
Speaker 1: talking for three or four years. Former bear Stone CEO
Speaker 1: is a bear Stone CEO and really one of the
Speaker 1: most widely respected bankers investment bankers in the United States.
Speaker 1: I mean he's you know, Disney's banker, Verizons banker, he's
Speaker 1: a he's a very well respected boardroom banker, UH and
Speaker 1: tactician and strategists. So, and he and I had become
Speaker 1: friends after the crisis, um and so it became it
Speaker 1: was a natural fit. They have, you know, a full
Speaker 1: hundred bankers who do you know, tech, media, telecom, power
Speaker 1: and energy, real estate and the whole uh landscape, waterfront
Speaker 1: as well as sales and trading. So they're kind of,
Speaker 1: you know, where what Morgan's Stanley and Goldman Sacks were
Speaker 1: back in the early nineties. Uh. They've built an independent
Speaker 1: investment bank but before they went public, before they went
Speaker 1: public and expanded their balance sheets enormously. Right. So you
Speaker 1: mentioned something in passing I can't let go by. You
Speaker 1: think we're at the leading edge of a wave of
Speaker 1: future structurings. Is that global? Is that industry specific where
Speaker 1: where do you see that happening? Well, let's do some stats. UM.
Speaker 1: You know, corporate to GDP is the highest it's been
Speaker 1: in American history. So we have a very lever corporate sector.
Speaker 1: And part of that is, you know, they're financial re
Speaker 1: engineering of their own balance sheets, stocked by backs funded
Speaker 1: with debt UM. Part of that is, you know, the
Speaker 1: buyout waves and leveraging generally that's associated with the buyouts UM,
Speaker 1: and part of that is UM. You know, just the
Speaker 1: general tend to the credit has been so cheap that
Speaker 1: that corporations have re engineered their own So that was
Speaker 1: that was the question I immediately popped into my mind
Speaker 1: if you said that was, well, is there a reason
Speaker 1: for them not to be leveraged up when money is
Speaker 1: almost not quite free? And as long as there, I
Speaker 1: hope everyone learned the lesson about UM fixed versus variable
Speaker 1: lending in the financial crisis. As long as those rates
Speaker 1: are locked in, it seems like their debt servicing is
Speaker 1: fairly affordable. It is, uh, but there are two sides
Speaker 1: of that, right, And you know, if your cash flows
Speaker 1: declined because of a recession, suddenly your leverage codes from
Speaker 1: manageable to unmanageable. And if you're an a rising interest
Speaker 1: rate environment, forget about floating rate. You know, a lot
Speaker 1: of bank debt is floating rate, but that's at a
Speaker 1: leverage level. It is generally two to three times, so
Speaker 1: it's not going to sink a company even into cline
Speaker 1: and cash loow environment. But the real risk is refinancing risk,
Speaker 1: which is exactly what we saw during the financial crisis
Speaker 1: with the financial In other words, they have to roll
Speaker 1: that debt over and now it's at a much higher rate,
Speaker 1: or maybe they can't roll it over at all. Exactly so,
Speaker 1: with a very highly leveled, levered corporate sector. And if
Speaker 1: you look at credit quality, Barry, I mean, I'm sure
Speaker 1: you know these stats of the so called investment grade
Speaker 1: debt is the body is the lowest investment grade ranking,
Speaker 1: and the non investment grade debt now constitutes more than
Speaker 1: half of all debt on the corporate sector in the
Speaker 1: United States. So you have a highly leveled sector with
Speaker 1: very low credit quality. Um, you know we could, and
Speaker 1: you have a FED raising interest rates, the federal government
Speaker 1: borrowing um like a drunken sailor on leave. I always
Speaker 1: object to that metaphor because drunken sailors spend their own
Speaker 1: money exactly. Okay, you're right, the federal government borrowing like
Speaker 1: there was no tomorrow. How about that? Fair enough? You've
Speaker 1: had a ringside seat to some of the most fascinating
Speaker 1: restructurings of recent memory. You either worked on these or
Speaker 1: near these, or people in the firm um did some
Speaker 1: work on them. US Airways, Charter Communications, the auto workers,
Speaker 1: the car makers bail out and reboot, even countries like
Speaker 1: Cyprus and Greece and in the United States Puerto Rico.
Speaker 1: So I have to ask you what do all these
Speaker 1: things have in common and what are the important differences
Speaker 1: when when you look at these big financial snaff foos,
Speaker 1: What what should we make of these? Yeah? So uh
Speaker 1: Tolstoy and Anna Karnina says that all happy families are alike,
Speaker 1: and each unhappy family is unhappy in its own way,
Speaker 1: and each restructuring, you know, is unique in its own way.
Speaker 1: There's sometimes it's management that just you know, went off
Speaker 1: on a frolic and detour, spend too much money, levered
Speaker 1: up and on a mistake and strategy. Other times, Uh,
Speaker 1: it's you know, a change in the business cycle. Uh.
Speaker 1: And highly levered balance sheet that takes a perfectly good
Speaker 1: company that uh, in ordinary times to generate even in
Speaker 1: bad times of generating cash flow, but it's just got
Speaker 1: the wrong balance sheet for the kinds of cash flow
Speaker 1: is capable of generating through a cycle. And so you're
Speaker 1: doing a balance sheet restructuring of a good business, um,
Speaker 1: you know. And other times it's a business that you know,
Speaker 1: whose time has come, whose mission has long since passed.
Speaker 1: Hypothetically company like Sears exactly. Um, and so we're not
Speaker 1: so hypothetically yeah, so world apparently yeah uh, you know,
Speaker 1: in the case of countries, it's some combination of investor enthusiasm,
Speaker 1: misplaced enthusiasm for sovereign debt, and a failure to really
Speaker 1: look at the underlying dynamics of the country's economy. Um.
Speaker 1: I was just in Iceland, and the story there is
Speaker 1: just it's crazy. It's now it's it's crazy again. Right.
Speaker 1: It's an island of you know, Boston, right, And and
Speaker 1: they were levered like eight one against GDP s just nuts. Well,
Speaker 1: they were a product of you know, open capital, no
Speaker 1: capital controls and capitals you know, swishing swashing through the system. Um.
Speaker 1: So how is that different from Greece re Puerto Rico.
Speaker 1: Well support I mean Puerto Rico, the capital markets were open. Uh.
Speaker 1: And as long as they were open, you could do
Speaker 1: deficit financing. Even those states and cities are not supposed
Speaker 1: to do deficit finance, that's right, but there. But you know,
Speaker 1: municipal bankers at which I do not count myself as one,
Speaker 1: have found lots of ways to us well, to find
Speaker 1: ways to finance deficits that are not completely transparent. Uh
Speaker 1: and so uh. Puerto Rico went into a recession in
Speaker 1: two thousand six as a result in change in federal
Speaker 1: law that had formally subsidized pharmaceutical production on the island.
Speaker 1: They had had a twenty year tax break that encouraged
Speaker 1: pharmaceuticals to do their final packaging on the island and
Speaker 1: created three fifty thousand jobs and lots of tax revenues.
Speaker 1: And that expired in two thousand and six. Puerto Rico
Speaker 1: went into a recession that they still have not come
Speaker 1: out of, you know, decade plus later, decade plus later.
Speaker 1: And they financed the decline at tax revenues with that, uh,
Speaker 1: lots of it. So they by the time they got
Speaker 1: to us mill Steining Company then in two thousand fourteen,
Speaker 1: they had seventy five billion dollars of debt for an
Speaker 1: island of three and a half million people. They had
Speaker 1: pension systems that were underfunded at the tune of thirty
Speaker 1: or forty billion dollars UH and UH, and a real
Speaker 1: inability to pay their debts win due and particularly as
Speaker 1: the capital markets shut to them. As long as you're
Speaker 1: gonna roll that debt over, doesn't matter. It doesn't matter. UM.
Speaker 1: But if you can't roll it over, because you know,
Speaker 1: suddenly you're borrowing what you would the debt you would
Speaker 1: incurred at two percent in the muni market, you're now
Speaker 1: having to pay eight percent tax free. UM. You know,
Speaker 1: it just makes it unsustainable. Right. I was on in
Speaker 1: Puerto Rico, I want to say, fourteen or fifteen, and
Speaker 1: already there was a brain drain going on. There were people, forget,
Speaker 1: it's not a different country. You could hop on an
Speaker 1: American Airlines flight and go anywhere in the United States,
Speaker 1: no passport required, right, and lots of people did UM
Speaker 1: and have UH and so in any event, so you know,
Speaker 1: countries are much more complex. UH. And you know we're
Speaker 1: seeing I frankly, we're doing a lot of work now
Speaker 1: in the United States, because you have a series of
Speaker 1: states that, um don't look all that much better than
Speaker 1: Puerto Rico did to Illinois has to be a giant
Speaker 1: Leinois Connecticut, I mean, all of the how did Connecticut
Speaker 1: go south so fast? I mean, at one point they
Speaker 1: were one of the wealthier states in the country. Well,
Speaker 1: there's still one of the welfare states in the country.
Speaker 1: Of the problem is is that they've their economy is
Speaker 1: growing slower than the rest of the surrounding states, and
Speaker 1: they've levered themselves up and deferred pension contributions for twenty years.
Speaker 1: And as we right, I mean, you know, this is
Speaker 1: the responsible handling of the commitments who make as a
Speaker 1: state is critical to the financial stability of the state.
Speaker 1: So if you're a fill in the blank teacher, police
Speaker 1: off for sir firemen in any of these states, are
Speaker 1: you gonna get a hundred cents on the dollar of
Speaker 1: your expected pension retirement or everything's on the table in
Speaker 1: order to make these states solving again, you know, it
Speaker 1: seems unlikely. Yeah, there's a three and a half trillion
Speaker 1: dollar deficiency in the funding of state employee pensions nationwide,
Speaker 1: three and a half trillion dollars. Uh. And the you know,
Speaker 1: the the problem for these public employees is that, um,
Speaker 1: you know, the at least today, even in Trump's America, Uh,
Speaker 1: there are no walls built between the boundaries of different states.
Speaker 1: So if a state starts over taxing compared to other states,
Speaker 1: it's it's employed, it's citizens and under serving them in
Speaker 1: terms of the provision of current services in the form
Speaker 1: of good infrastructure, good schools. Um. If people people believe,
Speaker 1: and when they leave, can what a mess they made
Speaker 1: over that they take them When they leave, they take
Speaker 1: their tax revolues and property taxes and income taxes with them,
Speaker 1: and it becomes an adverse feedback loop. A fewer and
Speaker 1: fewer number of citizens are supporting a greater and growing
Speaker 1: liability for legacy costs. And so you know this is
Speaker 1: there's going to have to be a reckoning here. That's
Speaker 1: the name of your next book. I like that. So
Speaker 1: let's talk about something that's a little more cheerful. I
Speaker 1: know you are a fan of watching the financial sector
Speaker 1: and looking at some of the dominant players which have
Speaker 1: become very concentrated post crisis. UH. And I know you're
Speaker 1: a fan of fintech what when you look at this
Speaker 1: are are these big companies gonna stay entrenched and keep
Speaker 1: putting up walls to prevent competition or can the new
Speaker 1: financial technologies? Um, can these new upstart companies break that
Speaker 1: hegemony from from the big finance companies. The answer to
Speaker 1: that is, um, it's going to depend on government policy
Speaker 1: because what is going on with the financials and fintech
Speaker 1: is similar to what's going on with Facebook and Snapchat
Speaker 1: and Google and every other you know, high flying startup
Speaker 1: technology company. Now, why aren't those tech companies just thought
Speaker 1: of as aggressively competing in the marketplace? And you have Apple,
Speaker 1: and you have Amazon, You've Google, your face, we have
Speaker 1: all these companies. Granted there are four giant winners, but
Speaker 1: still any you know, you could look at how many
Speaker 1: search engines were there before Google became dominant, right, so so,
Speaker 1: but these companies are rolling up you know, potential threats
Speaker 1: to their competition. Uh. And it's a great exit for
Speaker 1: a venture capitalist and for an entrepreneur has a great idea,
Speaker 1: um to sell yourself to Google to Amazon, to Apple
Speaker 1: to Facebook. And the big banks are doing the same thing.
Speaker 1: In fintech. There have been you know, a multitude of
Speaker 1: startups in and around the financial services space, and the
Speaker 1: big banks recognize the potential threats. So they're doing a
Speaker 1: lot of in house R and D, but they're also
Speaker 1: acquiring a lot of the new startups. And so government
Speaker 1: policy will really make a difference. And here's the thought
Speaker 1: experiment that I I urge you and your listeners to
Speaker 1: think about. So, today we have a bank centric deposit system. Right,
Speaker 1: if you want to store your money, have immediate access
Speaker 1: to your cash liquidity right, a trade off from liquidity
Speaker 1: versus return. You're gonna have a deposit account to bank
Speaker 1: UH to meet your ordinary and mediate spending needs. Um,
Speaker 1: it's safe because it's guaranteed by the federal government. UM.
Speaker 1: The banks in turn take your deposits and deposit them.
Speaker 1: There are excess reserves at the FAT, and the FEED
Speaker 1: is now paying them seventy five basis points for the
Speaker 1: privilege of having those exercis serves onto positive the FED.
Speaker 1: The FED is basically a clearing house among all the banks. Well,
Speaker 1: what if you, Barry Ridholtz, could have a deposit account
Speaker 1: at the FED. You could get seventy five basis points
Speaker 1: and you could direct the FED to transfer your money,
Speaker 1: to your mutual fund, to your utility bill, to your
Speaker 1: wherever you wanted it to go. In other words, what
Speaker 1: if you had a bank account at the FED UM
Speaker 1: If I could become a systemically important financial institution, I
Speaker 1: know they'll they'll be able to bail me out with
Speaker 1: Well maybe that that wouldn't come with your deposit. But
Speaker 1: but the the facility with which monetary policy could then
Speaker 1: be conducted is extraordinary, right, because if they want to
Speaker 1: encourage savings to be if they want to encourage savings
Speaker 1: and reduce the money supply, they would increase the interest
Speaker 1: rate in your deposit account. If they want to encourage
Speaker 1: investment and spending, they would reduce the interest rate, maybe
Speaker 1: even have a negative interest rate to force your money out.
Speaker 1: But the point is is that it would disintermediate the
Speaker 1: banks uh and banks arguably would have to go find
Speaker 1: other sources of funding other than subsidized deposits from the
Speaker 1: federal government. And you're implying fintech is going to play
Speaker 1: this role, well, potentially can't play this role. I don't
Speaker 1: know where you are on the cryptocurrency debate. I'm of
Speaker 1: full blown meth as opposed to Neureel who is you know,
Speaker 1: a full time still okay, but in effect the FED
Speaker 1: could issue with digital currency. You have a trusted agent
Speaker 1: issuing a digital currency that allows individuals to in effect
Speaker 1: transact uh in electronic form as opposed to just allowing
Speaker 1: via the blockchain. Is that what you're might implement it
Speaker 1: via plain but right now the implementation itself is quite
Speaker 1: expensive in blockchain. The processing costs, you know, far exceed
Speaker 1: with the the antiquated networks of Visa and MasterCard. UH
Speaker 1: they're processing costs. But it may get there. Now people
Speaker 1: something like of all cryptocurrencies have been lost and if
Speaker 1: I lose my credit card, my liability is capped at
Speaker 1: fifty dollars. So until we find a way around that, yeah, no,
Speaker 1: I think there are lots of problems with this. But
Speaker 1: the biggest problem, the biggest problem with any currency, fiat currency,
Speaker 1: is whether it's legal tender and so, you know, until
Speaker 1: until it's accepted as a form of payment by the
Speaker 1: federal government. It's really just a speculative tool. Quite quite fascinating.
Speaker 1: Can you stick around a little bit. I have a
Speaker 1: million more questions for you. We've been speaking with Jim Milstein.
Speaker 1: He is the co chairman of Guggenheim Securities. Uh. If
Speaker 1: you enjoy this conversation, we'll be sure and come back
Speaker 1: for the podcast extras, where we keep the tape rolling
Speaker 1: and continue discussing all things restructuring. You can find that
Speaker 1: at iTunes, Stitcher, overcast, Bloomberg dot com, wherever your finer
Speaker 1: podcasts are sold. We love your comments, feedback and suggestions
Speaker 1: right to us at m IB podcast at Bloomberg dot net.
Speaker 1: You can check out my daily column on Bloomberg dot
Speaker 1: com Slash Opinion, or follow me on Twitter at Riolts.
Speaker 1: I'm Barry Rihults. You're listening to Master's in Business on
Speaker 1: Bloomberg Radio. Welcome to the podcast, Jim. Thank you so
Speaker 1: much for doing this. I am not only fascinated by
Speaker 1: the entire financial crisis overcod that that was my doctoral
Speaker 1: thesis um sort of um, but there's so much minutia
Speaker 1: in that space that I think so many people don't know.
Speaker 1: And you were literally table right there. You were. You
Speaker 1: have a seat at the table right in the middle
Speaker 1: of that of the beast, and and never any interest
Speaker 1: in writing, uh a book going out. I mean, for
Speaker 1: posterity's sake, there should be a full data dump on
Speaker 1: everything you we we have, but not from the perspective
Speaker 1: of a central banker. I'm glad Bernankey had his expertise,
Speaker 1: although you know, whenever they screw up in surgery and
Speaker 1: they have to send someone in to fix it, it's
Speaker 1: never the original surgeon because he is a vest and
Speaker 1: interest in protecting his own reputation. My my thought process was, Hey,
Speaker 1: Larry Summers was there, you know, was the guy who
Speaker 1: repealed glass steel and passed the Commodities Future Modernization Act.
Speaker 1: Tim Geithner was the UM New York uh Federal Reserve President,
Speaker 1: and Bernanke was kind of there cheering green span along
Speaker 1: to doing all of his UM talk about a reputation collapse,
Speaker 1: but all of his ideology. Bernaky was right there with him.
Speaker 1: So I wonder if this really was the optimal Maybe
Speaker 1: that's the right word, the optimal crew to go on
Speaker 1: and rescue. That said, I completely appreciate Bernankee having had
Speaker 1: his expertise, and perhaps of all of them, he was
Speaker 1: the right guy in the right time. Yeah, well, Tim,
Speaker 1: Tim had his own qualifications, right, He had lived through
Speaker 1: I mean people thought he had worked at Goldman sax
Speaker 1: or something. He've been a long term treasury, right, he said,
Speaker 1: And he had gone through the Thai bot crisis, he
Speaker 1: had seen the crisis in Latin America in the eighties
Speaker 1: when he was a young man, So you know, I
Speaker 1: think he he came to the crisis, this crisis with
Speaker 1: some background and experience and understood the tools and the
Speaker 1: importance of doing what we did. So all that said, Um,
Speaker 1: you know, when I got out of the government, um,
Speaker 1: having been a corporate restructuring guy rather than a financial
Speaker 1: regulation financial industry banker, you know, I determined that I
Speaker 1: needed to go teach a course on financial regulation and
Speaker 1: the crisis in order to figure out what I had
Speaker 1: just gone through. And you know, you write in order
Speaker 1: to figure out what you think in your case, you
Speaker 1: teach in order to figure out exactly so, and you're
Speaker 1: still doing that at Georgetown. Yeah, I just finished the
Speaker 1: third semester of teaching on that with Tim Massett, who
Speaker 1: ran the CFTC under the last in the last Obama administration,
Speaker 1: and he had also been a treasury with us in
Speaker 1: the tar program, and so he and I taught that together,
Speaker 1: which was, you know, was it was fun to do
Speaker 1: it with him my third time around. But um, I
Speaker 1: think it's still too fresh, you know, from the point
Speaker 1: of viewing it. Yeah, but I think it's still too fresh.
Speaker 1: I mean, you have a lot of kind of you know,
Speaker 1: from the front line accounts that have already been written,
Speaker 1: and those were written pretty much in real time. They
Speaker 1: came out within a year or two exactly. And then
Speaker 1: you know, Secretary Guytner wrote his book, and Brananki wrote
Speaker 1: his book, and Paulson's written his book. Can there have
Speaker 1: been a couple of you know, lieutenants and sergeants have
Speaker 1: written their books, but I think plus random idiots who
Speaker 1: had to do with it out and spilled their point.
Speaker 1: I'm actually in the middle of reading um two's book,
Speaker 1: which I think is Adam two is. It's called Crashed.
Speaker 1: It just came out. Yeah, it's very good because it
Speaker 1: takes a it situates the crisis and the kind of
Speaker 1: macro economic environment of the early two thousands, of the
Speaker 1: early adds, and you know, if you've just cast you know,
Speaker 1: the thing about the crisis is it kind of overwhelmed
Speaker 1: everything else that might we might have been thinking and
Speaker 1: using as a frame of reference. It overwhelmed you know,
Speaker 1: the introduction of the iPhone, which has had at least
Speaker 1: as an important and impact of our culture and society
Speaker 1: as the crash itself had in two thousand eight. You know,
Speaker 1: the iPhone introduced in two thousand seven. But you know
Speaker 1: what two highlights is and it's relevant today to the
Speaker 1: existing problems with Chinese. You know, we had a savings glut.
Speaker 1: It we were all worried about that. We thought that,
Speaker 1: you know that I've always hated that. But but but
Speaker 1: it's true, having run deficits and trade deficits, run deficits
Speaker 1: since the Clinton administration, and run trade deficits since the sixties.
Speaker 1: You know, we've been exporting dollars around the globe for
Speaker 1: forty years at the same time that we're deregulating the
Speaker 1: financial system and the largest holder of dollars where you know,
Speaker 1: there were two pools, huge pools of dollars offshore in Europe, China,
Speaker 1: Japan and in Europe, right, and that savings glut was
Speaker 1: the you know, was the concern of the Fed and
Speaker 1: of all the Macronan wrote a white paper on that.
Speaker 1: I thought it was just the horrific, just completely clueless
Speaker 1: argument from people who were It's a classic example. I
Speaker 1: have a lot of respect for academic research and writing um.
Speaker 1: But often when you get into the real world situations,
Speaker 1: sometimes the academics take an idea and they go off.
Speaker 1: So what's what's more significant? The savings glut or rates
Speaker 1: at zero and bond managers scrambling for any sort of
Speaker 1: yield and telling their existing um traders and managers go
Speaker 1: find me some yield and if you can, I'll fire
Speaker 1: you and find someone who can. What's what's this all day?
Speaker 1: In some prime security stuff that is safe as treasuries
Speaker 1: and paying a few hundred basis points higher. Why don't
Speaker 1: we have more of that? That's a real world thing
Speaker 1: that the academics have a tendency to miss until until
Speaker 1: after the fact. Yeah, but you know, but they're in
Speaker 1: defense of some academics. My friends Gary Gordon and Andrew
Speaker 1: Metric at Yale have done, you know, great writing about
Speaker 1: the confluence of events that led to the great innovation
Speaker 1: of a subprime mortgage of you know, two year teaser
Speaker 1: interest or the three seven. I could have saved them
Speaker 1: a lot of paper and said, you have no real
Speaker 1: wage gains for thirty years, and people are going to
Speaker 1: do to maintain their living standard even though their incomes
Speaker 1: are much lower, so that means debt and restruct So
Speaker 1: here's another book, that obscure book that you might want
Speaker 1: to read called Capitalizing on Crisis. It's written by Krippner.
Speaker 1: I think it's her name, Greta Grippner, and it's all
Speaker 1: about the political um origins of of modern American finance
Speaker 1: and the story she tells, which I think is you
Speaker 1: and I lived through. I think you're a little younger
Speaker 1: than me, but not you got about five six years
Speaker 1: UM was that, you know, the stagflation of the nineteen
Speaker 1: seventies created political crisis because lasting impact that people were
Speaker 1: unaware of and and the one of the biggest policy
Speaker 1: initiatives of the Reagan administration every administration since has been
Speaker 1: to UH expand the provision of credit where income, where
Speaker 1: incomes were lagging and failing and falling behind. UM, we
Speaker 1: substituted credit, no doubt why. It sped credit availability, and
Speaker 1: you know, levered up both the government to do so,
Speaker 1: levered up the households in order to UH turn their
Speaker 1: homes into cash machines to supplement, so they could supplement
Speaker 1: their incomes with the increase in the value of their
Speaker 1: homes to finance the purchase of everything under the sun
Speaker 1: from every consumer durable available through credit cards and installment credit.
Speaker 1: A lot of that goes back to post World War
Speaker 1: two fifties and sixties, but really the seventies is what
Speaker 1: flipped that when suddenly giant inflation. No, that was the
Speaker 1: beginning of of no real wage gains, and then the
Speaker 1: whole Reagan era forward. It's clear that capital had a
Speaker 1: better seat at the government policy table than labor did.
Speaker 1: And thirty or forty years later we've seen what do
Speaker 1: we now night The the percentage of UM corporate profits
Speaker 1: as a percentage of GDP is at its all time high,
Speaker 1: which means that labor is getting less. I pretend to
Speaker 1: be a free market capitalist, but I can't help but
Speaker 1: look at those numbers and say, hey, this is problematic.
Speaker 1: We keep this up, and we're gonna elect some crazy
Speaker 1: populist as president and then what? Okay? And then what?
Speaker 1: And So here's another book for your listeners. It is
Speaker 1: called Can Capitalism Be Saved? By my good friends Steve Perlstein,
Speaker 1: who's the chief economics writer at the Washington Post, and
Speaker 1: he's written a really thoughtful book about is greed good? No?
Speaker 1: Is fairness? Going? To make us poor. No, um, you know,
Speaker 1: it's a very serious treatment of the questions that we're
Speaker 1: now confronting as a nation with the highest inequality in
Speaker 1: American history. So does he conclude capitalism can be saved
Speaker 1: or capitalism gonna be saved? But but we what we
Speaker 1: I mean? This has been true, you know, really since
Speaker 1: the progressive era. You know, the this is a joint
Speaker 1: venture between government and capital to come up with a
Speaker 1: society that is productive and just. So I have a
Speaker 1: this will be my last pet thesis. Europe began as
Speaker 1: a feudal system where the king owned everything and you
Speaker 1: were allowed to work on the land and if he
Speaker 1: threw you a little bit of wheat and some food
Speaker 1: to survive. That was up from zero. And the reason
Speaker 1: Europeans are so much more comfortable with some aspect of
Speaker 1: socialism with their capitalism is they started out with zero
Speaker 1: and as they went higher and higher, to them, oh wait,
Speaker 1: we we get to own land, We get to have
Speaker 1: well since you used to since the government used to
Speaker 1: provide everything, food protection, what have you? Having the government
Speaker 1: pay for healthcare and tournament and education seems to make sense.
Speaker 1: The US, on the other hand, started with the exact opposite.
Speaker 1: Government did nothing, and you're responsible for a hundred percent
Speaker 1: in your own safety. So one starting from zero and
Speaker 1: going up, in the other starting from a hundred and
Speaker 1: going down, and there's resistance in both directions. But well,
Speaker 1: the myths by which we live, right, I mean, you
Speaker 1: and I are are immediate parents, their grandparents. You have
Speaker 1: to go probably back four generations before you have someone
Speaker 1: homesteading right and you know, protecting themselves and fending for themselves.
Speaker 1: And yet this myth of the American frontier is very
Speaker 1: powerful in our political ideology and therefore in our social policy.
Speaker 1: But the reality, you know, four generations later from the
Speaker 1: last homestead of the last frontiers woman and man um
Speaker 1: is a is a multi ethnic, multi racial society. You know,
Speaker 1: we have one of the greatest challenges, I think in
Speaker 1: human history, which is can we create a tribe, one
Speaker 1: tribe out of many you know e players them? And
Speaker 1: it really is it befalls to us as Americans to
Speaker 1: figure out whether we can make this a democracy out
Speaker 1: of you know, many tribes. I think we need to
Speaker 1: do a better job of educating our students, not just
Speaker 1: teaching them to attest as as middle school and high
Speaker 1: school students, but having them have a better understanding of
Speaker 1: all these forces and and teaching them how to think,
Speaker 1: as opposed to teaching them to memorize. Because we've created
Speaker 1: several generations of people. So you and I both have
Speaker 1: an advantage of illegal education, which to me, the most
Speaker 1: important thing law school teaches you is not case law
Speaker 1: is not specific, but the entire process of here's the
Speaker 1: basic syllogism here. So you don't know what the law
Speaker 1: is going to look like in the future. You don't
Speaker 1: know what sort of random fact pattern human encounter. How
Speaker 1: can you, regardless of circumstances, apply some specific fact pattern
Speaker 1: to whatever the case law happens to be at that moment.
Speaker 1: You have to learn how to think. It's very flexible
Speaker 1: and it's it's very open minded. And I don't know
Speaker 1: of a lot of other industries that teach that. And
Speaker 1: I agree with you. I think the legal education and
Speaker 1: maybe it's I think it goes on maybe a year
Speaker 1: too long, but I think the training is unsurpassed. It's
Speaker 1: it's not what to think, but how to think. And
Speaker 1: I make fun of my m b A buddies who
Speaker 1: are taught what to think or they're taught the canon
Speaker 1: of financial literacy, but not necessarily. And now here's how
Speaker 1: to analyze when either this stops working or this goes
Speaker 1: wrong or and it's I don't want to make this
Speaker 1: a j D versus an m B A, but they're
Speaker 1: two very different philosophical approaches. And in the modern world
Speaker 1: where everything is topsy turvy, I have come to the
Speaker 1: conclusion that learning how to think is a tremendous skill
Speaker 1: to have. Yeah, but I also think I I agree
Speaker 1: with that, and and surely our schools can do a
Speaker 1: better job, um of developing that, you know, emotional intelligence
Speaker 1: and analytic ability, the ability to handle new facts uh
Speaker 1: and put them in find new patterns. Um. But I
Speaker 1: also think that the social media has isolated in a
Speaker 1: funny way, has isolated people from one another. It's isolating
Speaker 1: communities as much as it's creating a cross community the
Speaker 1: possibility of cross community communication. And so I've come around
Speaker 1: to the view that we really need national service that
Speaker 1: in order to works in Israel. Yeah, it works in
Speaker 1: Israel for and it and it made sense of us
Speaker 1: from all over the world, different ethnic and um national
Speaker 1: backgrounds into one little desert country. Uh. And it was
Speaker 1: a way of forging a national identity, and I think
Speaker 1: we have that problem in the United States now. We
Speaker 1: really we've we're separating into into separate tribes, and not
Speaker 1: just Democrat and Republican, but you know, the identity policy
Speaker 1: with a million splits, and I think, you know, I
Speaker 1: think two or three years of mandatory national service is
Speaker 1: the best hope for the future of this country. I
Speaker 1: have a buddy who's an American citizen at UBS, but
Speaker 1: he grew up in Switzerland. And I don't know if
Speaker 1: they're still doing this, but not all that long ago,
Speaker 1: every every citizen and every resident was obligated to serve
Speaker 1: at least one year in the military or some other right.
Speaker 1: It doesn't have to be a military here. I mean,
Speaker 1: I think, I think there's lots of need in America
Speaker 1: that could be met by a national corps. And I
Speaker 1: think having you know, the experience before you go to
Speaker 1: college of actually having to live and work with people
Speaker 1: different to yourself, but all of whom are American, would
Speaker 1: be a great national unifier. That's quite fascinating. In two
Speaker 1: thousand and eleven, I found this interesting quote of yours.
Speaker 1: The need for a Chief Restructuring Officer is really part
Speaker 1: of the past. So how did you realize, Hey, my
Speaker 1: work here is done, It's time to move on and
Speaker 1: and um the lone Rangers goes off into the sunset.
Speaker 1: How what made you come to that conclusion? Well, I
Speaker 1: think the the macro economic condition Shirley had eased, so
Speaker 1: the FED had embarked on its quantitative easing. The markets
Speaker 1: had rallied. Uh. You know the depth of the market,
Speaker 1: the equity market and the credit market. Where in May
Speaker 1: of two thousand nine, by the time you got to
Speaker 1: the end of two thousand ten, you had seen a
Speaker 1: rally back. The rallies had both started in both markets,
Speaker 1: and most importantly, by the end of two thousand nine,
Speaker 1: the inter bank lending market opened up again. The banks
Speaker 1: were actually comfortable enough with each other to start ending
Speaker 1: to each other overnight. And uh. And that was a
Speaker 1: pretty real sign of that that the crisis had passed. Um.
Speaker 1: But you know, I was part of the cleanup crew,
Speaker 1: and part of my job was to um get the
Speaker 1: taxpayers money back. Um. You know, by the time, by
Speaker 1: the time two thousand ten had ended, we had struck
Speaker 1: a deal with a I. G. S Board for a
Speaker 1: complete recapitalization of the company. We had converted some dead
Speaker 1: into tarbe equity, some fed dead into talk equity along
Speaker 1: the way in two thousand nine, UM, and then we
Speaker 1: did a series of asset sales and restructurings from a
Speaker 1: I G. We reduced its balance sheet from a trillion
Speaker 1: dollars of assets to half a trillion of assets, selling
Speaker 1: off its Asian life insurance operations, it's Middle East life
Speaker 1: insurance operations, it's Middle European life insurance operations, and a
Speaker 1: hundred other businesses along the way that they were involved in.
Speaker 1: So what is a I G look like today? So
Speaker 1: I do today? Is still the large one of the
Speaker 1: largest property casualty insurers in the world. UM, it's one
Speaker 1: of the largest domestic life insurance companies. Uh, and UH
Speaker 1: not a lot else. We sold off the aircraft leasing business,
Speaker 1: the consumer finance business, as I said, all these other
Speaker 1: worldwide life insurance operations. They had a ton of assets
Speaker 1: that were very savable. They were very savable, and as
Speaker 1: a result of the assets sales, we managed to use
Speaker 1: the st sales to pay off the FEDS loans, leaving
Speaker 1: the federal government with you know, fifty billion dollars of
Speaker 1: preferred stock. We converted the preferred stock UM into the
Speaker 1: common stock, and so we now had a liquid market,
Speaker 1: and eventually we had a liquid market into which to
Speaker 1: offload the treasuries shares of common stocks. So so that
Speaker 1: brings up another peeve of mine. I think that process
Speaker 1: where the rescuer gets most of the equity is a
Speaker 1: reasonable one. Hey, we're taking all the risk, we're putting
Speaker 1: up all this money. Maybe this works out, maybe it
Speaker 1: doesn't UM, And so there's a big upside at the
Speaker 1: end of it. Not that the government is doing this
Speaker 1: for the trade. They want to prevent the next Great depression,
Speaker 1: but it seems fair. We didn't seem to do that
Speaker 1: with anybody else. We rescued Bank America, Merrow Lynch City
Speaker 1: for I don't know the fourteen time city has been
Speaker 1: bailed out. I think it's three or four over the
Speaker 1: past century. They have a long history of that. Go
Speaker 1: down the list of other companies that were that needed
Speaker 1: bailing out UM, and we're rescued and we're a liquid
Speaker 1: But their balance sheet was transparent. You know. The one
Speaker 1: lesson everybody forgets from Lehman Brothers is if you're gonna
Speaker 1: have an opaque balance sheet, that's forget the insolvency, just
Speaker 1: the inability for anyone to figure out what the hell
Speaker 1: is going on there? If you need to rescue, you're trouble,
Speaker 1: and and that's a big part of that. So why
Speaker 1: didn't we take a similar approach to a I G.
Speaker 1: Where effectively Uncle Sam was the dead rain possession financer
Speaker 1: and when that worked out, they captured whatever upside there
Speaker 1: was to be captured. Yeah, So I think, Look, I
Speaker 1: think the the structure of the TART program UM, which
Speaker 1: was where we and few ultimately determined to infuse preferred
Speaker 1: stock equity into the balance sheets of all the major
Speaker 1: financial institutions UM, I think there could be some serious
Speaker 1: criticism of the way it was done, particularly by I
Speaker 1: think it may have created more of a political backlash
Speaker 1: for sure against the program that it ted party and
Speaker 1: everything else. Well, I mean they're the origins of the
Speaker 1: two party or something we could made for a while.
Speaker 1: But no doubt the crisis had something to do with it.
Speaker 1: But I think the one, I mean, the one criticism
Speaker 1: I would have of the initial TART program was that
Speaker 1: the UM as long as the preferred stock was outstanding,
Speaker 1: the company should not have been permitted to pay the
Speaker 1: kinds of bonuses that they paid, right, I mean, as
Speaker 1: long as you're beholden to the federal government for equity
Speaker 1: on your balance and would have to sign off on bonuses. Eventually,
Speaker 1: they didn't sign off on the two thousand nine bonuses.
Speaker 1: Two thousand eight bonuses, and I think that was the one.
Speaker 1: Those are the bonuses that provoked the enormous political because
Speaker 1: most of the back bonuses not paying Yeah, and I
Speaker 1: think most Americans were kind of, you know, right in
Speaker 1: the view of like, wait a second, you're paying yourself
Speaker 1: billions of dollars of bonuses with taxpayer money for bankrupting
Speaker 1: the company. Nice work, here's a bonus, now the counter.
Speaker 1: You know what Secretary Paulson would say, who designed this
Speaker 1: these preferred is it was important that everyone participated. Every
Speaker 1: all the major institutions participate, because we couldn't permit the
Speaker 1: negative inference that if Jamie Diamond held out that he
Speaker 1: was the only solid bank in America. Uh. And so
Speaker 1: they had to make the terms of the preferred as
Speaker 1: relatively benign and painless as possible in order to induce
Speaker 1: widespread participation by all of the institutions, so there could
Speaker 1: be no picking and choosing of winners and losers. And
Speaker 1: so so here's where I make fun of academics again.
Speaker 1: And you don't want to be too heavy handed, but
Speaker 1: you could have had a less egregious set up. And
Speaker 1: if Jamie Diamond doesn't want to participate, well then Bernaki
Speaker 1: has to say to him full new Jersey bent nose accents. Hey,
Speaker 1: nice bank, you got their shame if anything were to
Speaker 1: happen to it. How much more do you have to
Speaker 1: say to say, listen, this is a disaster. We're about
Speaker 1: to have the Great Depression. Either you participate in this
Speaker 1: or I have a feeling that the next time you
Speaker 1: come to the normal transaction process at the FED, which
Speaker 1: is what every single day. Yeah, good luck with that. Yeah,
Speaker 1: so I I are you on that? I mean, I
Speaker 1: mean I actually got into a fight with Elizabeth Warren
Speaker 1: during a public hearing when I was testifying about what
Speaker 1: we were doing with the I G and Ally Financial
Speaker 1: and she she was beating me up that we should
Speaker 1: have tried to extract a discount from a I G.
Speaker 1: S counterparties on their um uh CDs on c d
Speaker 1: O s, which your audience probably understands what I just
Speaker 1: meant In those acronyms, uh and um, sort of counterproductive
Speaker 1: if you want to reliquefy the system and encourage some
Speaker 1: some counterparty. But you had the power, she said, you
Speaker 1: had the power to get Goldman Sacks to give up
Speaker 1: a discount rather than to pay them off in full.
Speaker 1: Wasn't this a backdoor ball out of Goldman's Act? And
Speaker 1: I was like, okay, secretary, but she wasn't secretary, And
Speaker 1: I was you know, um, professor Warren. If so, you
Speaker 1: tell me how I'm supposed to as a over in
Speaker 1: the United States, how I'm supposed to play that hand.
Speaker 1: I'm supposed to benefit a i G S shareholders by
Speaker 1: taking it out of Goldman Sex, when in fact we're
Speaker 1: standing behind both of these companies. The whole point was
Speaker 1: to avoid defaults across the system and to avoid ai
Speaker 1: G defaulting on any of its obligations, because if it
Speaker 1: defaulted on any of its obligations, it's credit rating would
Speaker 1: have been impaired and we would have been started had
Speaker 1: to write even bigger checks um a political response. But
Speaker 1: but meanwhile, the the you know, there's there was no
Speaker 1: good solution. That was just what was the least bad solution,
Speaker 1: and ultimately even though we've recovered, there's been a cost
Speaker 1: to this recovery between income inequality and the rise of populism.
Speaker 1: And you know, it's um it's one of those things
Speaker 1: that it could have been a whole lot worse, but
Speaker 1: part of me feels like it it would have been,
Speaker 1: it could have been a lot better. Yeah, I think
Speaker 1: the big mistake politically was the stimulus. If you look
Speaker 1: with the Chinese, too small the Chinese, you know, and
Speaker 1: if you look at what the federal government's doing now
Speaker 1: right these Republicans who were um totally opposed to the
Speaker 1: Obama stimulus have just enacted you know, one of the
Speaker 1: largest tax a trillion dollars at way higher in the
Speaker 1: economic cycle and as opposed to right in and by
Speaker 1: the way, for those of you who don't like that
Speaker 1: comment about a Republican controlled Congress affecting a giant stimulus,
Speaker 1: be sure and send your emails to Jim Millstein at
Speaker 1: Yahoo dut com. Ye, but it's true. You know, if
Speaker 1: Kane's had this right in the middle of a financial crisis,
Speaker 1: you cut taxes, you deficit spends, and when you have
Speaker 1: a robust economy, that's when you can stop your deficit.
Speaker 1: Spending and and raise taxes and balance the budget. We've
Speaker 1: done it totally aspect right and and so you know,
Speaker 1: in the two thousand nine we got Democratic controlled Congress
Speaker 1: to do a stimulus bent, but Obama. But Obama went
Speaker 1: back to the well in two thousand and ten, after
Speaker 1: the Tea Party took the Republican Congress in eleven, I
Speaker 1: just couldn't get it done, went back with an infrastructure program,
Speaker 1: could never get anything from the Republicans. McConnell uh specifically said,
Speaker 1: my role is to make sure he gets nothing else
Speaker 1: done going right. So for you know, so we you
Speaker 1: reap what you're so, I guess we do. So. I
Speaker 1: have a million other questions, but I want to get
Speaker 1: to our favorite questions before and and uh so let's
Speaker 1: jump let's jump right into this. Um, what's the most
Speaker 1: important thing that people don't know about Jim Milstein? God, Um,
Speaker 1: I'm a horrible golfer. Really yeah, me too. But I
Speaker 1: don't play golf, Okay that I don't know. I'm I'm
Speaker 1: a glutton for punishment. But you play regularly, you know,
Speaker 1: I try. I don't can't play regularly, but I try.
Speaker 1: That's very funny. Tell us about your early mentors. UM,
Speaker 1: I had a professor at Princeton, a guy named Sheldon
Speaker 1: Woland who recently passed, who is a political theorist, UM
Speaker 1: and a historian of political theory. And you know that's
Speaker 1: what I did my first years as an academic. So
Speaker 1: he had a very important influence on my intellectual development. UM.
Speaker 1: As a career, I had a had a partner Clary
Speaker 1: Gotliam nim Al and Applebam who really taught me how
Speaker 1: to be a lawyer. Uh, taught me the whole how
Speaker 1: to deal with clients, how to analyze the situation, had
Speaker 1: to take a multi parties with conflicting interests and uh
Speaker 1: and produce a common result. It was acceptable to you know,
Speaker 1: we haven't even discussed your dad, who is a renown attorney.
Speaker 1: How how did he impact your career decision? Did you
Speaker 1: know you were always going to be a lawyer? And
Speaker 1: it was like a residency requirement in my in my family,
Speaker 1: I kind of had the same thing. He UM. You know,
Speaker 1: my father loves He's still alive and still you know,
Speaker 1: practicing here and there, still practicing, still practicing, still getting advice,
Speaker 1: still giving advice to people he's consulted. And the thing
Speaker 1: is he loved when I was growing up, he just
Speaker 1: loved what he did, right. So I mean it was hard,
Speaker 1: you know, to look at him and be with him
Speaker 1: and not see the law as something that was incredibly engaging. UM.
Speaker 1: And because it and for him it was and as
Speaker 1: has been for me, a mix of um, you know,
Speaker 1: a crossing between private sector and public sector. I mean,
Speaker 1: the law, the rule of law is what governs our
Speaker 1: private relations. But someone has to create that. Yeah, somebody
Speaker 1: has to create that law and um, and that's a
Speaker 1: public policy, the exercise. So what maybe this is a
Speaker 1: good point to ask this question. What attorneys uh and
Speaker 1: other professionals have influenced the way you approach both legal banking,
Speaker 1: banking and public service. Um. You know there's been lots
Speaker 1: of influences on that, but I mean, I think the
Speaker 1: I think the important point here is that, UM, the
Speaker 1: I have found that, UM, there's really no upside to dishonesty.
Speaker 1: UH and that you know, people who can't be trusted
Speaker 1: are people who are not going to get stuff done
Speaker 1: except in dark rooms and back alleys. UH. And so
Speaker 1: if you want to work in the social, political, legal
Speaker 1: business world, UH, you know, your reputation is the most
Speaker 1: important thing you have, and and observance of ethics and honesty.
Speaker 1: I know this is a counterfactual and this administration, but
Speaker 1: the observance of ethics and honesty is extremely important to
Speaker 1: your long term success. I'm looking for a response to that,
Speaker 1: and the only thing I could come up with is
Speaker 1: it's funny how each subsequent administration's popularity gets revisited in
Speaker 1: the future. Not only has George Bush's reputation gone up
Speaker 1: during this administration, but the Obama administration's ratings have all
Speaker 1: gone up, especially because you know, drama free, no scandals.
Speaker 1: The key word that keeps coming up is integrity and
Speaker 1: hopefully that will matter again at one point in our future. Yes,
Speaker 1: I'm sure it will. Um, you mentioned a couple of books.
Speaker 1: Tell us what your favorite books are? What do you
Speaker 1: read for fun fiction nonfiction? A nonfiction reader? And you know, again,
Speaker 1: after after having gone through a major historical event and
Speaker 1: had a ringside seat, I'm I've been reading lots around,
Speaker 1: did um, But I think the most interesting nonfiction book
Speaker 1: I've read non unrelated to the financial crisis is a
Speaker 1: book called Sapiens and Uh by Harari, and I think
Speaker 1: it's an extremely important book. Um. Have you seen the
Speaker 1: follow up? I haven't read the He's Gotten More. It's
Speaker 1: much darker, much more. This book is very interesting. I
Speaker 1: don't agree with everything in it, um, but at least
Speaker 1: there's some recognition that humanity is special. And Homodaeus is like,
Speaker 1: all right, now here's how everything goes to hell in
Speaker 1: the future. But I think I think the fundamental inside
Speaker 1: of Sapiens is Um, it's really important, which is, you know,
Speaker 1: the success of the species has been our ability to
Speaker 1: collaborate around abstract concepts. Are you know, our communications obviously key,
Speaker 1: the development of language and all of that, but then
Speaker 1: the ability to collaborate and coordinate our behavior. You're around
Speaker 1: abstract concepts, concepts of God, concepts of nation, of state,
Speaker 1: of community. I mean, these are all abstractions. Um, you
Speaker 1: couldn't you know, you can't visualize the nation except through
Speaker 1: symbols and through uh, you know, a summary of its
Speaker 1: history and UH a set of objectives that you might
Speaker 1: believe are important to it to achieve in the future. UM.
Speaker 1: And you know, to me, that's the big challenge of
Speaker 1: the that the country faces is an ability again to
Speaker 1: figure out how to collaborate together on a common future
Speaker 1: across this very diverse country. Quite quite interesting. Um, what
Speaker 1: are you excited about right now? What? What do you
Speaker 1: think is a fascinating UM issue or topic these days?
Speaker 1: You know, with the New York Giants having gone one
Speaker 1: and four to start this season. I'm I'm just so pressed. Um,
Speaker 1: it's very hard to focus on anything other than that
Speaker 1: for the moment, still licking my wounds. So let's talk
Speaker 1: about a time you failed and what you learned from
Speaker 1: that experience. UM. Yeah, So I I was in as
Speaker 1: a young lawyer, not so young. I was handling my
Speaker 1: first major cross border restructuring and um, the creditors are
Speaker 1: represented by one of the greats of the bankruptcy bar
Speaker 1: Leonard Rosen. It walked out Rosen, Lipton and Cats. He's
Speaker 1: the Rosen and walked out. Yeah. And he was just
Speaker 1: a gentleman of a scholar and a wonderful person. And
Speaker 1: we were having a dialogue as to how we were
Speaker 1: going to land this company and restructuring. He representing the credits,
Speaker 1: me representing the debtors, and and we were we had,
Speaker 1: as you can only have with Leonard, a kind of
Speaker 1: gentlemanly disagreement with regard to sort of what the endgame was,
Speaker 1: who was going to end up owning the company, and
Speaker 1: how we were gonna restrict trip and uh, we were
Speaker 1: resisting putting the company in front of a judge too
Speaker 1: soon until we had an agreement with the creditors, because
Speaker 1: most bankruptcies are less expensive and less time consuming prepacted right.
Speaker 1: The judges there to confirm what everyone's agreed, rather than
Speaker 1: to mediate the dispute on going. And so we were
Speaker 1: resisting filing it. And Leonard thought that, you know, we
Speaker 1: were being irrational and impudent and um and so he
Speaker 1: did something that I didn't believe could be done. He
Speaker 1: filed an involuntary petition. He the creditors put the company
Speaker 1: into bankruptcy in Canada, and under Canadian law, I had
Speaker 1: been advised by my Canadian co council this was not
Speaker 1: a procedure available to creditors. And so Leonard picked up
Speaker 1: the phone. So he called me one morning. He said,
Speaker 1: I think you need be in Toronto this afternoon and
Speaker 1: I said why. He said, because we have put the
Speaker 1: company into a CC double a proceeding in UM the
Speaker 1: Ontario Superior Courts this morning. And I said, you can't
Speaker 1: do that. He said, well he just did. Uh and
Speaker 1: so um, you know the lesson. The failure was a
Speaker 1: failure of imagination, a failure to realize that the law
Speaker 1: is not a given but something that is created and
Speaker 1: constantly created every day, a little, a little more flexible
Speaker 1: than you imagine exactly. That. That's that's quite quite interesting.
Speaker 1: So what do you do for fun other than be
Speaker 1: a terrible golfer? So I hike. Um, I've got a
Speaker 1: group of friends that we've gone on various you know,
Speaker 1: trips across around the world, you know, hiking and exhausting ourselves. Um,
Speaker 1: that's been uh interesting. We went to we went to
Speaker 1: Norway last two last year or the year before, and
Speaker 1: we're just discussing Norway last night. That's up and down
Speaker 1: the Fiord country. It was gorgeous, food was spectacular and
Speaker 1: we had a stopover on the way to the hike
Speaker 1: and Oslo and on the back on and then on
Speaker 1: coming back in Stockholm. And Stockholm is just an amazing city,
Speaker 1: an amazing city. And these two countries, and these two
Speaker 1: countries actually really um for for Americans, um, and particularly
Speaker 1: you know, given our current dispute about the role of
Speaker 1: government and inequality. A trip to these countries should be
Speaker 1: mandatory because they have UM national healthcare, they have UM,
Speaker 1: you know, subsidized higher education, they have UM where, they
Speaker 1: have affordable housing, subsidies, paternal all of that, all of
Speaker 1: those basic social system supports. And yet they're dying ynamic
Speaker 1: economies with entrepreneurship and growth rates that rival ours. Now,
Speaker 1: they're small, homogeneous countries, they don't have the UM many
Speaker 1: of the challenges we have in establishing common commonality. But
Speaker 1: but these are you know, what the right would call
Speaker 1: social welfare states that are functioning UM where the gap
Speaker 1: between the richest and the poorest is only three times,
Speaker 1: not the three hundred times it is in the United States. UM.
Speaker 1: And yet they've maintained a sense of entrepreneurialism and dynamism
Speaker 1: in their economy. The the the nanny state is not
Speaker 1: necessarily um, you know, deterring dynamism and entrepreneurship in the economy.
Speaker 1: Sound sounds fast. I've been to Helsinki, I've been to Copenhagen.
Speaker 1: I've never never been to Stockholm. Um, I assume you
Speaker 1: do that in the summer and not yes, exactly. UM.
Speaker 1: So if some young lawyer, recent college grad, a millennial
Speaker 1: came to you and said they were thinking about a
Speaker 1: career in restructuring and that aspect of banking. What sort
Speaker 1: of advice would you give them. Well, it's a choice,
Speaker 1: is just just as we were talking about before, is
Speaker 1: a choice between business school and law school. It's a
Speaker 1: good law school, Um, get firm grounding in uh in
Speaker 1: the law. Um. You know, it's been a great career
Speaker 1: for me. You're the I like being a problem solver.
Speaker 1: And you know, each of these restructurings as different as
Speaker 1: I said before. But you know, an effect, you're taking
Speaker 1: something and uh and you know, making something out of
Speaker 1: a failure and um, you know, and sometimes this something
Speaker 1: is just redeploying the capital, liberating the capital that's involved
Speaker 1: in a bad business. Um. But most of the time,
Speaker 1: you know, you're you're figuring out what went wrong and
Speaker 1: fixing it uh and saving you know, capital and jobs
Speaker 1: and uh. And you know, so you can kind of
Speaker 1: feel like you did something good. Quite quite interesting. And
Speaker 1: our final question, what do you know about the world
Speaker 1: of corporate restructuring today that you wish you knew thirty
Speaker 1: years ago when you were really first getting started. Well,
Speaker 1: it's you know, this has been we talked a little
Speaker 1: bit about the deregulation and the financial system. I mean
Speaker 1: the consequence of that is we went into the ninet
Speaker 1: eighties with a bank centric financial system where credit intermediation
Speaker 1: was primarily conducted by banks. We ended, Uh, we came
Speaker 1: out of the financial crisis after forty years of de
Speaker 1: regulation with a market centered funding system. And UM, the
Speaker 1: development of the secondary markets and the secondary credit markets. UM,
Speaker 1: the shadow banking, the shadow banking system starting with you know,
Speaker 1: the junk bonds created by Mike Milliken in the late eighties. UM.
Speaker 1: You know, we have a bond market that now dominates
Speaker 1: credit and intermediation, and we and the bond market has
Speaker 1: greater and greater transparent ency with secondary you know, with
Speaker 1: traits all the time and prices. So there's a there's
Speaker 1: the illusion of fair value created by you know, the
Speaker 1: day to day pricing of a given bond. UM that
Speaker 1: that pricing may not hold, and that prices may not hold,
Speaker 1: and it may it may reflects applied demand dynamics rather
Speaker 1: than fundamental value. UM, it may reflect you know, the
Speaker 1: interest rate policy of the Federal Reserve as compared to
Speaker 1: where it was at a when the bond was originally issued. UM.
Speaker 1: There are lots of it. But but but market participants
Speaker 1: today who live by their marks and are judged by
Speaker 1: their marks, and are measured by their marks, and are
Speaker 1: compensated by their marks. Um that is that that is
Speaker 1: the biggest difference. Right. I used to sit in rooms
Speaker 1: in the nineteen eighties with banks and insurance companies and
Speaker 1: talk about fundamental value and the mark didn't matter. What
Speaker 1: they were trying to do is maximize the recovery of
Speaker 1: their position. And today room with traders who are trying
Speaker 1: to who are trying to maximize their liquidity, and there
Speaker 1: and and their mark and very different from fundamental That
Speaker 1: quite fascinating. We have been speaking with Jim Milstein. He
Speaker 1: is currently the co chairman of Guggenheim Securities, an adject
Speaker 1: professor at Georgetown University Law, and former Chief Restructuring officer
Speaker 1: at Treasury. If you enjoy this conversation, we'll be sure
Speaker 1: and look up an inch or down an inch on Apple, iTunes, overcast, Stitcher,
Speaker 1: Bloomberg dot com and you can see any of the
Speaker 1: other two hundred and twenty five such conversations we've had
Speaker 1: over the past four plus years. We love your comments,
Speaker 1: feedback and suggestions. Right to us at m IB podcast
Speaker 1: at Bloomberg dot Net. I would be remiss if I
Speaker 1: did not thank the crack staff that helps put together
Speaker 1: these conversations each week. Michael Batnick is my head of research.
Speaker 1: Medina Parwana is my producer. Taylor Riggs is our booker.
Speaker 1: Attica val Bron is our project manager. I'm Barry Ridholts.
Speaker 1: You've been listening to Masters in Business on Bloomberg Radio.