WEBVTT - Jim Millstein on the Fed and AIG’s Restructuring (Podcast) 0:00:02.200 --> 0:00:06.800 This is Master's in Business with Barry Ridholts on Bloomberg Radio. 0:00:09.720 --> 0:00:12.799 This week on the podcast, I have an extra special guest. 0:00:12.920 --> 0:00:17.640 His name is Jim Milstein, and he has a fascinating history, uh, 0:00:18.120 --> 0:00:22.000 not just in the worlds of corporate restructuring, but related 0:00:22.040 --> 0:00:25.520 to the financial crisis and the restructuring of A I 0:00:25.680 --> 0:00:30.480 G and a variety of other um debacles. He's had 0:00:30.520 --> 0:00:33.199 a front row seat to. Uh. If you are at 0:00:33.280 --> 0:00:37.599 all a student of how companies go bad and what 0:00:37.680 --> 0:00:40.559 we do with them afterwards, you're going to find this 0:00:41.200 --> 0:00:45.400 to be an absolutely fascinating conversation. He has a deep 0:00:45.520 --> 0:00:50.040 expertise in this space, starting out at Cleary Gottlieb, going 0:00:50.080 --> 0:00:55.160 to Lazard Frere's, launching his own firm, Milstein and Company, 0:00:55.160 --> 0:00:59.440 which was recently purchased by Guggenheim Securities, and Dead Center 0:00:59.560 --> 0:01:02.880 in the middle of that being the chief restructuring officer 0:01:02.920 --> 0:01:06.280 at the Treasury Department, in the middle of the bailouts 0:01:06.400 --> 0:01:09.880 um oh nine ten eleven. So I found this to 0:01:09.920 --> 0:01:13.960 be an absolutely intriguing conversation, and I suspect you will 0:01:14.000 --> 0:01:18.240 as well. With no further ado my conversation with Jim Milstein, 0:01:21.720 --> 0:01:25.039 I'm Barry Ridholts. You're listening to Master's in Business on 0:01:25.080 --> 0:01:29.360 Bloomberg Radio. My special guest this week is Jim Milstein. 0:01:29.840 --> 0:01:33.560 He is the co chairman of Guggenheim's Securities Uh. He 0:01:33.640 --> 0:01:36.400 comes to us with a bachelor's from Princeton a master's 0:01:36.400 --> 0:01:40.440 from Berkeley. He graduated with a degree in law from Columbia. 0:01:40.959 --> 0:01:45.160 Currently he's an adjunct professor at Georgetown University Law Center. 0:01:45.640 --> 0:01:50.160 But perhaps most interesting for our purposes, he was the 0:01:50.240 --> 0:01:54.360 Chief Restructuring Officer at Treasury from two thousand nine to 0:01:54.440 --> 0:01:58.640 two thousand eleven, responsible for oversight and management of Uncle 0:01:58.720 --> 0:02:04.360 Sam's la just financial sector rescues. Indeed, he was the 0:02:04.400 --> 0:02:09.959 principal architect of the restructuring of American International Group. Jim Milstein, 0:02:10.360 --> 0:02:13.560 Welcome to Bloomberg. Great to be here. Thanks. So you 0:02:13.680 --> 0:02:17.280 have a fascinating background. You begin your career as a 0:02:17.360 --> 0:02:21.320 lawyer at Cleary Gottlieb. What did you imagine your career 0:02:21.400 --> 0:02:25.000 was gonna look like when you first started as an attorney. Well, 0:02:25.040 --> 0:02:27.320 like many attorneys, I kind of wandered into my first 0:02:27.400 --> 0:02:30.280 job without a real clear vision of what I was 0:02:30.320 --> 0:02:33.799 gonna do. But um, you know, Reagan had gotten elected. 0:02:33.880 --> 0:02:37.280 I had spent a couple of years out of Berkeley 0:02:37.360 --> 0:02:40.079 being a policy analyst and working on what was then 0:02:40.120 --> 0:02:44.040 called industrial policy, which was something that the United States 0:02:44.600 --> 0:02:48.440 probably implements only through the Defense Department UH and UM, 0:02:49.600 --> 0:02:51.679 but we had been part of a small group of 0:02:51.720 --> 0:02:54.360 scholars who were trying to urge the United States to 0:02:54.480 --> 0:02:57.800 deal with the then Japanese threat to our electronics and 0:02:57.840 --> 0:03:03.840 semiconductor and steele an automobile industry is by actually coordinating tariff, trade, tax, 0:03:04.280 --> 0:03:09.160 and investment policy the way Trump is doing that. Well yeah, 0:03:09.200 --> 0:03:13.639 maybe not quite not so coordinated. Yeah, but the basic 0:03:13.720 --> 0:03:17.040 premises we should be proactive here. Yeah, well, you know 0:03:17.120 --> 0:03:19.440 other countries are right. We were dealing with the mercantist 0:03:19.560 --> 0:03:23.119 nation in Japan, really Germany the same after World War Two. 0:03:23.280 --> 0:03:27.000 China is obviously now engaged in the signal signs of yeah, 0:03:27.000 --> 0:03:28.760 the same kinds of behavior. But they've all learned from 0:03:28.800 --> 0:03:31.200 each other. You know, the Koreans learned from the Japanese, 0:03:31.200 --> 0:03:33.360 the Chinese learned from both of them, and they have 0:03:33.400 --> 0:03:38.640 a coordinated policy of credit, investment, tax, trade, UH in 0:03:38.720 --> 0:03:42.440 order to promote domestic employment and production. And you know, 0:03:42.440 --> 0:03:45.400 the United States, we've taken a more free market hands off. 0:03:45.480 --> 0:03:48.040 Le's a fair approach, and you can see the consequences now, 0:03:48.880 --> 0:03:52.480 um as we find ourselves in a much more competitive environment. Anyway, 0:03:52.960 --> 0:03:55.040 low story short spent a lot of a couple of 0:03:55.120 --> 0:03:58.440 years working on those kinds of issues. Reagan gets elected, 0:03:58.440 --> 0:04:03.440 we're now in the You know, Reagan Thatcher dismantle the 0:04:03.520 --> 0:04:08.200 welfare state. UH, industrial policy is probably the never going 0:04:08.240 --> 0:04:10.360 to be on that agenda. So I determined, instead of 0:04:10.360 --> 0:04:13.360 going back to Washington and working in the government, I'm 0:04:13.400 --> 0:04:17.080 gonna work for a liberal international law firm, Cleary Gottlieb 0:04:18.080 --> 0:04:22.520 that helped create the predecessor to the European Union after 0:04:22.560 --> 0:04:24.919 World War Two. A group of it was founded by 0:04:24.960 --> 0:04:29.440 a group of State Department UM officials in Paris and 0:04:29.480 --> 0:04:33.120 Washington simultaneously, and they helped create the Iron and Steel Union, 0:04:33.160 --> 0:04:36.120 which was the precursor of the EU. So how do 0:04:36.160 --> 0:04:40.040 you transition from Cleary Gottlieb to Lezard Freres. That doesn't 0:04:40.080 --> 0:04:42.919 seem like a natural path. Well, I had been working 0:04:43.000 --> 0:04:47.440 on the Lazard and clearly shared a client called Pan 0:04:47.480 --> 0:04:51.239 American Airways, which was the dominant international carrier in the fifties, 0:04:51.240 --> 0:04:55.720 sixties and seventies and inside PanAm and disappeared into the 0:04:55.760 --> 0:04:58.760 dustbin of history. But in the fifties, sixties, seventies, and 0:04:59.160 --> 0:05:02.880 eighties it was the dominant international carrier for the United States. 0:05:03.040 --> 0:05:06.599 It fell on hard times as markets were deregulated and 0:05:06.640 --> 0:05:10.400 they found themselves uh subject to competition they really couldn't 0:05:10.440 --> 0:05:14.200 handle because they were a product of a regulated industry, 0:05:14.800 --> 0:05:20.040 and they ultimately went bankrupt. Blazard and Cleary shared it. 0:05:20.040 --> 0:05:22.560 It was my first big debtor case as a lawyer, 0:05:23.640 --> 0:05:26.840 running in effect and orderly liquidation of Panama, selling its 0:05:26.920 --> 0:05:29.760 roots off to United and to American and hither and 0:05:29.880 --> 0:05:33.880 yon and uh. And at the end of the case, 0:05:34.560 --> 0:05:36.360 Felix wrote and called me and said during the wrong 0:05:36.400 --> 0:05:39.520 business she really should be a banker. And I resisted 0:05:39.560 --> 0:05:43.600 then that was like nine two or nine. I resisted 0:05:43.720 --> 0:05:48.320 changing my career then. But in nineteen nine they came 0:05:48.360 --> 0:05:51.760 calling again. And after I was working on a large 0:05:51.760 --> 0:05:56.679 restructuring in Korea called day Wu. They had giant company 0:05:56.720 --> 0:05:59.960 they again one of the one of the Korean kiddets. 0:06:00.040 --> 0:06:04.520 So their version UH and you know, trading company of 0:06:04.520 --> 0:06:10.160 steel company, electronics company, textile company, finance, real estate. The 0:06:10.200 --> 0:06:12.599 whole nine yards ten percent of the Korean economy and 0:06:12.680 --> 0:06:15.440 one company under one roof what could go wrong with that? 0:06:15.600 --> 0:06:17.599 What can go wrong with that? And they borrowed sixty 0:06:17.640 --> 0:06:20.560 billion dollars and all over God's Green Earth, and you know, 0:06:20.640 --> 0:06:22.560 fell on hard times as a result of the Tai 0:06:22.640 --> 0:06:25.200 Bak crisis, which became the Korean law crisis in the 0:06:25.279 --> 0:06:30.640 late nineties, and so they hired, They hired clearly, and 0:06:30.680 --> 0:06:34.000 then I was in charge of that, and I hired 0:06:34.120 --> 0:06:37.839 Lizard to help me with it because they had restructuring 0:06:37.920 --> 0:06:40.760 and they had presence all over God's Green Earth where 0:06:40.800 --> 0:06:42.760 we had to restructure various debts. So I got to 0:06:42.800 --> 0:06:45.400 know the guys running that practice very well. At the 0:06:45.480 --> 0:06:47.800 end of it, they leaned over across the aisle from 0:06:47.920 --> 0:06:52.320 some god awful flight from Tokyo to New York and said, 0:06:52.360 --> 0:06:53.840 you know, you're in the wrong business. And I said, 0:06:53.880 --> 0:07:00.200 I've heard this, so this time I succumbed to the 0:07:00.200 --> 0:07:02.599 the offer. So you're there from two thousand to two 0:07:02.640 --> 0:07:06.560 thousand eight, and we had a couple of little things 0:07:07.160 --> 0:07:10.680 happened in oh eight. How did you go from Lazard 0:07:10.880 --> 0:07:16.040 to incorporate restructuring to working with Uncle Sam, who was 0:07:16.040 --> 0:07:18.400 a little concerned about Lehman and a I G and 0:07:18.440 --> 0:07:23.480 everything else. So I answered, the phone is basically the 0:07:23.880 --> 0:07:27.200 is basically the answer to that. I had a you know, 0:07:27.200 --> 0:07:29.160 it's funny how the world works. I had a friend, 0:07:29.880 --> 0:07:33.440 a guy had worked with when he was a young, 0:07:34.240 --> 0:07:39.400 UH policy analyst in the Carter administration, when I was 0:07:40.000 --> 0:07:42.400 a young whipper snapper lawyer. Well now, when I was, 0:07:42.880 --> 0:07:45.280 you know, graduate student at a Berkeley and I was 0:07:45.360 --> 0:07:48.280 writing things on industrial policy, and he was reading them 0:07:48.280 --> 0:07:54.000 and helping promote them across the Carter administration. And uh, anyway, 0:07:54.240 --> 0:07:57.120 I picked up, you know, shortly after the election, like 0:07:57.320 --> 0:08:01.200 ten minutes after the election of President in Obama, then 0:08:01.280 --> 0:08:03.640 to be President Obama. I got a call from him 0:08:03.680 --> 0:08:05.480 and he said, you might have noticed we're doing a 0:08:05.560 --> 0:08:09.160 couple of restructurings down here. The admitted the new administration 0:08:09.200 --> 0:08:11.280 could use someone with your background. Would you be willing 0:08:11.320 --> 0:08:14.320 to come? And you know, I've always had an interest 0:08:14.360 --> 0:08:17.120 and who would have believed that the country needed my 0:08:17.200 --> 0:08:21.560 expertise in particular, but there it was quite quite fascinating. 0:08:21.920 --> 0:08:24.880 So you mentioned you got a phone call. What made 0:08:24.960 --> 0:08:28.280 you decide to take what sounded like a pretty thankless 0:08:28.400 --> 0:08:31.400 role well that's you know, that's what I do for 0:08:31.440 --> 0:08:35.040 a living, pretty thankless roles. But um, you know, I 0:08:35.080 --> 0:08:37.840 think the I thought I might be able to make 0:08:37.880 --> 0:08:41.880 a modest contribution given my background and uh and I 0:08:41.960 --> 0:08:45.000 had been, you know, a student of the financial crisis 0:08:45.040 --> 0:08:47.559 as it was unfolding. We at Lazard, you know, we're 0:08:47.640 --> 0:08:50.000 running the leading restructuring practice. We had a lot of 0:08:50.000 --> 0:08:53.720 these the front end of the subprime crisis running and 0:08:53.800 --> 0:08:58.400 you know coming through our doors America mortgage companies, originators 0:08:58.400 --> 0:09:01.079 and distributors coming through. I mean the you know, they 0:09:01.120 --> 0:09:03.000 were the first to fail, right at the front end 0:09:03.080 --> 0:09:04.880 of the system, with the first to fail, and that 0:09:04.960 --> 0:09:09.200 was enough seven Uh. And you know, I'm a curious fellow, 0:09:09.240 --> 0:09:11.800 and I was. There was a plethora of these companies 0:09:11.840 --> 0:09:14.319 coming in. It was like what's going on. There was 0:09:14.360 --> 0:09:19.520 a website called mortgage implode dot com and it tracked 0:09:19.679 --> 0:09:22.400 something like four hundred of them, but it would track 0:09:22.440 --> 0:09:24.439 it in real time and kept a running list. It 0:09:24.520 --> 0:09:27.040 was quite astonishing. And some of the biggest ones, you know, 0:09:27.160 --> 0:09:29.720 new century American home mortgage showed up at our doors 0:09:29.720 --> 0:09:32.200 as our clients. We were you know, presided over and 0:09:32.240 --> 0:09:36.800 helped them liquidate themselves in effect, and uh so, I 0:09:37.320 --> 0:09:39.760 you know, my antenna went up. I got smart about 0:09:39.760 --> 0:09:43.280 the subprime crisis and the leveraging of the financial system 0:09:43.400 --> 0:09:48.320 and how they were levering themselves around these products and others. Um. 0:09:48.400 --> 0:09:51.400 So when this call came, you know, having become a 0:09:51.440 --> 0:09:54.360 student of what had gone on in the American financial 0:09:54.400 --> 0:09:58.400 industry between two thousand and two thousand eight, um, you know, 0:09:58.679 --> 0:10:01.880 with my curiosity alone drove me to Washington. So so 0:10:01.960 --> 0:10:04.959 the news crosses, A I G gets a hundred and 0:10:05.120 --> 0:10:09.520 eighty two billion dollar bail out. What's your immediate response 0:10:09.559 --> 0:10:12.080 when you see these These are hard We're kind of 0:10:12.200 --> 0:10:15.520 used to them today, but at the time, these numbers 0:10:15.559 --> 0:10:18.720 were just unfathomable. Yeah. I mean by the time I 0:10:18.800 --> 0:10:23.200 got there, Um, A I G had already um borrowed 0:10:23.320 --> 0:10:26.480 from the Fed in one pocket or another a hundred 0:10:26.520 --> 0:10:29.120 and thirty two billion dollars. So that was in over 0:10:29.360 --> 0:10:33.040 the course of eight weeks between September eighteenth, when the 0:10:33.040 --> 0:10:37.160 first loan was initially in was inked, to the time, 0:10:37.320 --> 0:10:39.040 you know, the transition team was in place and we 0:10:39.040 --> 0:10:42.280 were now trying to figure out what we're going on. Um, 0:10:42.800 --> 0:10:44.720 they had borrowed a hundred and thirty two billion dollars, 0:10:44.880 --> 0:10:48.520 and that's when you know the restructuring first began. Right 0:10:48.600 --> 0:10:54.080 that the in in most cases with the exceptional demon brothers, 0:10:54.120 --> 0:10:56.120 what the federal government, the FED, the Treasury, and the 0:10:56.160 --> 0:11:00.480 fdi C did during the um course of two thousand 0:11:00.600 --> 0:11:03.760 eight was just refinance the balance sheets, the short term 0:11:03.760 --> 0:11:05.520 debt coming due on the balance sheets of all of 0:11:05.520 --> 0:11:09.520 these companies, basically saying, these companies are effectively solvent, but 0:11:09.640 --> 0:11:13.480 they have a very short term liquidity issue and if 0:11:13.480 --> 0:11:17.000 we could free that up, well, these are companies worth 0:11:17.320 --> 0:11:20.520 worth saving and if they crash it causes a big 0:11:20.559 --> 0:11:23.240 problem otherwise well, and insalvency expert would say, they're two 0:11:23.280 --> 0:11:26.320 definitions in its solvency. There's a balance sheet in solvency 0:11:26.360 --> 0:11:29.520 where your liabilities exceedure fair market value of your assets, 0:11:29.960 --> 0:11:32.360 and then there's illiquidity. You're an inability to pay your 0:11:32.360 --> 0:11:34.800 debts win due. It was clear at the time that 0:11:34.920 --> 0:11:36.800 none of these companies could pay their debts win due. 0:11:36.840 --> 0:11:39.920 They needed, in effect what the FED was established to do, 0:11:40.000 --> 0:11:42.440 to be a lender of last resort, an emergency provider 0:11:42.480 --> 0:11:45.200 of liquidity when the markets freeze up. In their panics, 0:11:45.280 --> 0:11:47.400 and the FED and the fdi C and the Treasury 0:11:47.400 --> 0:11:49.440 Department did this to a fairly well during the Bush 0:11:49.440 --> 0:11:53.240 administration under the leadership of Secretary Paulson and Ben Bernanky 0:11:53.280 --> 0:11:57.720 at the FED. UM. So by the time we get there, 0:11:58.400 --> 0:12:00.800 uh in you know later, oh ay, we haven't yet 0:12:00.800 --> 0:12:02.960 assumed the powers. But there's a transition going on, a 0:12:02.960 --> 0:12:06.560 baton passing exercise going on between the Pauls and Treasury 0:12:06.559 --> 0:12:09.960 Department and the guid Treasury Department UM, and those guys 0:12:10.000 --> 0:12:13.160 had worked together previously, so it wasn't like they were strangers. 0:12:14.040 --> 0:12:16.360 Was at the president of the New York FED. So 0:12:16.400 --> 0:12:18.760 everybody kind of knew each Yeah, no, no, that there 0:12:18.800 --> 0:12:21.640 was a very seamless transition. And you know, sometimes you 0:12:21.640 --> 0:12:23.880 get lucky as a country. Right, we have the leading 0:12:24.080 --> 0:12:27.640 economic historian of the Great Depression saying, as the chairman 0:12:27.679 --> 0:12:29.880 of the Federal Reserve, he may not have had a 0:12:29.920 --> 0:12:31.680 playbook as to what to do, but he knew what 0:12:31.720 --> 0:12:34.200 the FED did wrong in the thirties and he was 0:12:34.280 --> 0:12:37.360 dedicated not to doing that again. Hey, learning what not 0:12:37.440 --> 0:12:39.439 to do was half the battle and put your way 0:12:39.480 --> 0:12:42.080 ahead of people. So so you mentioned the difference between 0:12:42.080 --> 0:12:46.400 the liquidity event and a solvency event. And you mentioned 0:12:46.400 --> 0:12:49.800 in passing Lehman Brothers. Let's talk about that a second. 0:12:50.000 --> 0:12:53.439 There have been some academic studies that said, at the 0:12:53.559 --> 0:12:57.560 time Lehman Brothers went belly up, their value was somewhere 0:12:57.600 --> 0:13:02.880 between a negative hundred billion dollars and negative two billion dollars. 0:13:02.960 --> 0:13:06.520 Of all the companies out there, they really seem to 0:13:06.559 --> 0:13:11.520 be completely insolvent. Fair statement. Well, so if you took 0:13:11.520 --> 0:13:15.000 a snapshot, I would venture to say, if you took 0:13:15.040 --> 0:13:18.599 a snapshot and mark to market the balance sheets of 0:13:18.679 --> 0:13:23.760 any of the major financial institutions, particularly the broker dealers Goldman, Morgan, Stanley, 0:13:24.840 --> 0:13:30.760 Meryl Lynch Ah on September one, maybe make it September ninth, 0:13:30.800 --> 0:13:33.960 the day after Fanny and Freddie are taken into conservatorship, 0:13:34.000 --> 0:13:38.240 and panic runs through the entire conventional and subprime already 0:13:38.280 --> 0:13:41.040 run through the subprime market, but now you take the 0:13:41.240 --> 0:13:46.760 largest mortgage so can exactly and you put them in 0:13:46.760 --> 0:13:50.280 a conservationship on the on the theory that either they're 0:13:50.320 --> 0:13:53.400 illiquid and need the government support, or they're insolvent and 0:13:53.480 --> 0:13:57.680 need the government's balance sheet to back them. Ah, if 0:13:57.720 --> 0:14:01.560 you took a snapshot of the balance sheets of any 0:14:01.600 --> 0:14:03.880 of the major financial institutions in the the United States on 0:14:03.920 --> 0:14:07.040 September nine, and said, mark this all to market right now, 0:14:07.600 --> 0:14:10.200 where anything is trading, I dare say in a balance 0:14:10.200 --> 0:14:13.360 sheet basis, they'd all look and solvent. But and that 0:14:13.440 --> 0:14:16.000 was sort of the thing is, there's a relationship between 0:14:16.000 --> 0:14:19.520 your ability to maintain a position and your solvency. So, 0:14:19.640 --> 0:14:22.600 you know, Kaine's famously said, the markets can stay irrational 0:14:22.640 --> 0:14:25.000 longer than you can stay solvent. But if you can 0:14:25.040 --> 0:14:29.600 stay solvent that is liquid, through a downturn, you're okay. 0:14:29.680 --> 0:14:32.400 And so in fact better come out the other side 0:14:32.480 --> 0:14:34.880 actually pretty good. So in the case of Lehman, right, 0:14:34.960 --> 0:14:37.200 so you have Lehman Weekend. You know this story has 0:14:37.240 --> 0:14:42.240 been told many times, but the FED, at the New 0:14:42.280 --> 0:14:44.880 York Fed, they're trying to figure out if they can 0:14:44.920 --> 0:14:47.800 broke her a marriage between Lehman and Barkley's or Lehman 0:14:47.840 --> 0:14:51.640 and Bank of America, and each of those institutions prospective 0:14:51.640 --> 0:14:54.160 buyers is doing diligence as fast as they can on 0:14:54.280 --> 0:14:56.760 Lehman's book to try and figure out which part of 0:14:56.760 --> 0:14:59.200 the bank, if maybe the entire part of the bank, 0:14:59.240 --> 0:15:02.600 they will take and um. In particular, b of A 0:15:02.720 --> 0:15:05.280 has done as good a job as could be done 0:15:05.280 --> 0:15:09.000 in the circumstances and analysis of Lehman's real estate portfolio, 0:15:09.440 --> 0:15:13.360 and they conclude that the marks that the that the 0:15:13.440 --> 0:15:17.680 last marks on the portfolio vastly overstate the value fabricated 0:15:17.760 --> 0:15:20.280 completely fabricaly well, who knows where there's fabricator? The market 0:15:20.280 --> 0:15:23.320 was can collapse if you could have held onto it, 0:15:23.640 --> 0:15:27.680 So who knows? So lets let me share my pet peeves, 0:15:28.200 --> 0:15:31.160 which is the will will hold aside the fast by 0:15:31.320 --> 0:15:34.680 rule change that no longer required mark to market. Will 0:15:34.680 --> 0:15:38.200 discuss that later. But the REPO one oh five. If 0:15:38.320 --> 0:15:42.320 if you have to every quarter a few days before 0:15:42.360 --> 0:15:45.280 you report your earnings and you have to square up 0:15:45.320 --> 0:15:49.240 your quarterly numbers, you have to move fifty plus billion 0:15:49.280 --> 0:15:53.560 dollars of liability off your balance sheet, that kind of 0:15:53.600 --> 0:15:57.920 implies that not only is your accounting not somewhat opaque, 0:15:58.520 --> 0:16:02.600 but it implies that you were committing accounting fraud on 0:16:02.680 --> 0:16:06.720 your investors. And you're probably either in bad shape or 0:16:06.800 --> 0:16:10.760 deeply insolvent. And we've since found that forget the market 0:16:10.760 --> 0:16:14.200 to market, they're deeply insolvent. Yeah, okay, so that was 0:16:14.240 --> 0:16:17.840 the conclusion the federal reached, and they concluded that they 0:16:17.880 --> 0:16:20.120 really didn't have a statutory based on which to be 0:16:20.160 --> 0:16:25.200 able to fund provide emergency lending to Lehman. Um. You know, 0:16:25.240 --> 0:16:28.280 I think in retrospect, given the fallout that immediately occurred 0:16:28.320 --> 0:16:30.840 upon the filing of that bankruptcy, maybe we should have 0:16:30.880 --> 0:16:36.200 been more creative. We could have foisted losses on the shareholders. 0:16:36.200 --> 0:16:41.000 We could have foisted right well that we had a bankruptcy. Um. 0:16:41.040 --> 0:16:43.720 You know, we could have achieved the kind of you know, 0:16:43.880 --> 0:16:48.760 anti moral hazard problem with bailouts potentially in the way 0:16:48.800 --> 0:16:52.120 we structured alone to the broker dealer so as to 0:16:52.160 --> 0:16:54.760 avoid the kind of adverse impacts that I mean that 0:16:55.200 --> 0:16:59.360 the filing of Lehman Brothers created a panic. Well, okay, 0:16:59.480 --> 0:17:01.800 I'm not going to disagree with that. And so you 0:17:01.840 --> 0:17:06.600 know that the whole the whole script of the rescue 0:17:06.920 --> 0:17:09.960 from you know, the beginning of with Bear Stearns to 0:17:10.040 --> 0:17:12.400 the opening of the f X lines to make sure 0:17:12.480 --> 0:17:16.480 that the European banks didn't default against their on their 0:17:16.480 --> 0:17:19.800 own debt and therefore default on their American counterparties, which 0:17:19.840 --> 0:17:22.919 would have created a liquid crisis here to the you know, 0:17:23.000 --> 0:17:25.960 putting a Fannie and Freddie into conservatorship, the saving of 0:17:26.000 --> 0:17:29.280 a I G. A series of emergency the alphabet soup 0:17:29.320 --> 0:17:33.639 of emergency lending programs, the Fed instituted um, you know, 0:17:33.680 --> 0:17:37.800 the prime dealer credit facility, the TALF, the TAFF, the 0:17:38.520 --> 0:17:41.080 you know, commercial paper facility. I mean, you know, there 0:17:41.160 --> 0:17:44.879 was every market that had frozen up. They intervened in 0:17:44.960 --> 0:17:48.159 and tried to restart in order to provide liquidity to 0:17:48.240 --> 0:17:50.919 the system. And so the question is, you know, in 0:17:50.920 --> 0:17:56.199 the midst of that just tsunami of credit support and liquidity, 0:17:56.320 --> 0:17:59.560 you decide to take one company down. My my pet 0:17:59.600 --> 0:18:02.760 thesis is Dick Fold said no to Warrn Buffett's offer 0:18:02.840 --> 0:18:07.000 to inject capital over the summer. And I wish I 0:18:07.080 --> 0:18:09.000 was a fly on the wall in that room, because 0:18:09.160 --> 0:18:12.920 I have to imagine between Paulson and BERNANKI and guys 0:18:12.920 --> 0:18:16.119 and there someone said this, This idiot said no to 0:18:16.119 --> 0:18:20.040 Warren Buffett. How can we possibly save him? They had 0:18:20.080 --> 0:18:23.000 an opportunity. He was a pig, He's always been a pig, 0:18:23.200 --> 0:18:24.920 and now he should be in an orange jumpsuit. But 0:18:25.000 --> 0:18:30.640 let's we're not automatons. Personalities and personal histories matter, and 0:18:30.680 --> 0:18:32.840 I So I don't think there's uh, I don't think 0:18:32.880 --> 0:18:36.280 you're crazy in that thought. So let's talk a little 0:18:36.320 --> 0:18:41.359 about what's going on currently in your career. Um, after 0:18:41.480 --> 0:18:44.280 you leave Treasury, you go to work as a bank 0:18:44.359 --> 0:18:47.280 run an investor, and you pretty much decided to hang 0:18:47.280 --> 0:18:50.280 out your own Shingle Millstein and Company. UM tell us 0:18:50.280 --> 0:18:52.520 about the launch of that firm and what the thinking 0:18:52.680 --> 0:18:57.560 was as opposed to being attached to another giant financial entity. Yeah, 0:18:57.560 --> 0:18:59.560 I mean, one thing working in the government cures you 0:18:59.640 --> 0:19:03.720 of is the desire to have a boss. So, UM, 0:19:03.760 --> 0:19:06.199 I decided I would set up my own shop. I 0:19:06.240 --> 0:19:10.720 really had no you know, grand plans, but um uh 0:19:10.800 --> 0:19:13.880 we went from you know, one answering one another call 0:19:13.960 --> 0:19:16.000 to another call to another column before I knew it. 0:19:16.720 --> 0:19:18.720 You know, I had offices in New York and Washington, 0:19:18.760 --> 0:19:21.639 and we were working on large corporate restructurings and sovereign 0:19:21.640 --> 0:19:26.159 restructurings again and uh and also you know, reinvesting the 0:19:26.160 --> 0:19:28.720 profits of the business. The partners, the guys who joined 0:19:28.720 --> 0:19:31.000 me and galleys and gals who joined me, you know, 0:19:31.080 --> 0:19:34.639 we all agreed that, uh, the advisory business is a 0:19:34.680 --> 0:19:37.440 business that goes up and down. The revenue is volatile, 0:19:37.480 --> 0:19:40.480 whereas if we could actually make some solid investments, we 0:19:40.560 --> 0:19:43.600 might be able to provide ourselves with a little more 0:19:43.680 --> 0:19:47.160 secure income in a manner and to generate wealth, particularly 0:19:47.200 --> 0:19:49.760 for the young kids who were working for me. So anyway, 0:19:50.520 --> 0:19:53.720 seven years into this, we ended up with thirty five 0:19:53.760 --> 0:19:57.880 people doing corporate and sovereign restructuring and you know, fifteen 0:19:57.920 --> 0:20:02.960 people doing investing. We had raised some third party funds. Uh. 0:20:03.040 --> 0:20:06.320 And you know, I'm not getting any younger. I'm sixty 0:20:06.320 --> 0:20:09.520 three years old. And the people who had joined me 0:20:09.600 --> 0:20:12.560 were all in their thirties and forties. And you know 0:20:12.640 --> 0:20:16.199 I turned to them and said, uh, we have a 0:20:16.240 --> 0:20:20.040 strategic problem. Uh. To strategic problems one where a small 0:20:20.080 --> 0:20:22.919 boutique entering what I think will be a tsunami of 0:20:22.960 --> 0:20:26.600 restructuring to come. Uh. And we really could use the 0:20:26.680 --> 0:20:29.280 leverage of a larger firm with you know, arms and 0:20:29.359 --> 0:20:34.960 legs in various industries with real industry expertise as opposed 0:20:35.000 --> 0:20:39.080 to our sort of products specialty UH called restructuring. On 0:20:39.119 --> 0:20:41.479 the one hand, and the other strategic challenge was, you know, 0:20:42.040 --> 0:20:45.879 We've built a franchise and and I'm not getting any younger. 0:20:45.960 --> 0:20:49.840 So eventually we concluded that merging with a larger financial 0:20:49.840 --> 0:20:52.960 services firm made sense. Alan Shortz and I had been 0:20:52.960 --> 0:20:56.919 talking for three or four years. Former bear Stone CEO 0:20:57.080 --> 0:20:59.000 is a bear Stone CEO and really one of the 0:20:59.040 --> 0:21:04.720 most widely respected bankers investment bankers in the United States. 0:21:04.760 --> 0:21:07.920 I mean he's you know, Disney's banker, Verizons banker, he's 0:21:07.960 --> 0:21:13.359 a he's a very well respected boardroom banker, UH and 0:21:13.720 --> 0:21:16.800 tactician and strategists. So, and he and I had become 0:21:16.840 --> 0:21:20.720 friends after the crisis, um and so it became it 0:21:20.760 --> 0:21:22.440 was a natural fit. They have, you know, a full 0:21:22.520 --> 0:21:26.560 hundred bankers who do you know, tech, media, telecom, power 0:21:26.560 --> 0:21:31.200 and energy, real estate and the whole uh landscape, waterfront 0:21:32.240 --> 0:21:34.320 as well as sales and trading. So they're kind of, 0:21:34.440 --> 0:21:37.560 you know, where what Morgan's Stanley and Goldman Sacks were 0:21:37.600 --> 0:21:41.200 back in the early nineties. Uh. They've built an independent 0:21:41.240 --> 0:21:44.159 investment bank but before they went public, before they went 0:21:44.200 --> 0:21:48.119 public and expanded their balance sheets enormously. Right. So you 0:21:48.200 --> 0:21:51.760 mentioned something in passing I can't let go by. You 0:21:51.800 --> 0:21:54.879 think we're at the leading edge of a wave of 0:21:55.000 --> 0:21:59.920 future structurings. Is that global? Is that industry specific where 0:22:00.000 --> 0:22:05.159 where do you see that happening? Well, let's do some stats. UM. 0:22:05.200 --> 0:22:08.320 You know, corporate to GDP is the highest it's been 0:22:08.520 --> 0:22:12.960 in American history. So we have a very lever corporate sector. 0:22:13.000 --> 0:22:14.919 And part of that is, you know, they're financial re 0:22:15.000 --> 0:22:17.919 engineering of their own balance sheets, stocked by backs funded 0:22:17.920 --> 0:22:20.840 with debt UM. Part of that is, you know, the 0:22:20.880 --> 0:22:26.919 buyout waves and leveraging generally that's associated with the buyouts UM, 0:22:27.000 --> 0:22:29.800 and part of that is UM. You know, just the 0:22:29.840 --> 0:22:33.280 general tend to the credit has been so cheap that 0:22:33.280 --> 0:22:36.439 that corporations have re engineered their own So that was 0:22:37.119 --> 0:22:39.440 that was the question I immediately popped into my mind 0:22:39.520 --> 0:22:42.439 if you said that was, well, is there a reason 0:22:42.480 --> 0:22:44.960 for them not to be leveraged up when money is 0:22:45.720 --> 0:22:49.320 almost not quite free? And as long as there, I 0:22:49.359 --> 0:22:54.320 hope everyone learned the lesson about UM fixed versus variable 0:22:55.200 --> 0:22:57.960 lending in the financial crisis. As long as those rates 0:22:57.960 --> 0:23:01.679 are locked in, it seems like their debt servicing is 0:23:01.760 --> 0:23:06.960 fairly affordable. It is, uh, but there are two sides 0:23:07.000 --> 0:23:08.800 of that, right, And you know, if your cash flows 0:23:08.840 --> 0:23:12.479 declined because of a recession, suddenly your leverage codes from 0:23:12.480 --> 0:23:15.960 manageable to unmanageable. And if you're an a rising interest 0:23:16.040 --> 0:23:19.399 rate environment, forget about floating rate. You know, a lot 0:23:19.480 --> 0:23:21.800 of bank debt is floating rate, but that's at a 0:23:21.880 --> 0:23:24.239 leverage level. It is generally two to three times, so 0:23:24.320 --> 0:23:27.000 it's not going to sink a company even into cline 0:23:27.000 --> 0:23:30.280 and cash loow environment. But the real risk is refinancing risk, 0:23:30.320 --> 0:23:32.680 which is exactly what we saw during the financial crisis 0:23:32.880 --> 0:23:35.640 with the financial In other words, they have to roll 0:23:35.720 --> 0:23:38.120