WEBVTT - Gretchen Morgenson: From Wall Street to Journalism 0:00:02.040 --> 0:00:07.160 This is Master's in Business with Barry Ridholds on Bloomberg Radio. 0:00:09.480 --> 0:00:12.600 This week on the podcast, I have an extra special guest. 0:00:13.000 --> 0:00:17.680 Gretchen Morgensen is the Pulitzer Prize winning investigative journalist for 0:00:17.760 --> 0:00:20.479 The Wall Street Journal and The New York Times. She 0:00:20.560 --> 0:00:25.600 currently works at NBC News as an investigative reporter. She 0:00:25.760 --> 0:00:29.920 has worked at Money Magazine, Forbes, worth all over the place. 0:00:29.960 --> 0:00:34.239 Her last book was a bestseller, Reckless Endangerment is all 0:00:34.240 --> 0:00:38.200 about the mortgage crisis. The current book is called These 0:00:38.280 --> 0:00:42.120 Are the Plunderers. How private Equity runs and recks America. 0:00:42.360 --> 0:00:45.720 That's a little bit of a sensationalistic headline. When we spoke, 0:00:46.280 --> 0:00:51.479 the focus and conversation is really emphasizes the largest of 0:00:51.560 --> 0:00:55.760 the large private equity firms. Yes, there's a legitimate need 0:00:55.840 --> 0:00:59.600 and use for private equities, especially in mid markets where, 0:01:00.240 --> 0:01:02.960 to be blunt, Wall Street has just abandoned that space 0:01:03.040 --> 0:01:06.640 and gone up market, creating a vacuum. But we talk 0:01:06.720 --> 0:01:10.240 about some really fascinating things. Thirty percent of operating rooms 0:01:10.240 --> 0:01:13.920 are managed and run by doctors employed by private equity. 0:01:14.200 --> 0:01:17.720 That's a shocking number. We looked at everything from retail 0:01:17.800 --> 0:01:23.240 to nursing, homes, to hospitals, to insurance companies to manufacturers. Really, 0:01:23.600 --> 0:01:29.520 private equity used to be a small, outperforming sector of alternatives. 0:01:30.000 --> 0:01:35.160 It's now become giant, dominated by four firms, and no 0:01:35.200 --> 0:01:38.800 longer generating outsize returns. It's really a kind of fascinating 0:01:39.280 --> 0:01:41.959 aspect of this. As it's become more and more mainstream, 0:01:42.760 --> 0:01:46.560 it appears some of the performance advantages may have gone away. Anyway, 0:01:47.200 --> 0:01:52.120 Gretchen is a legend on Wall Street. She's won Lobe 0:01:52.160 --> 0:01:55.640 Awards and just about every other journalistic award there is. 0:01:55.680 --> 0:01:59.400 So when she dives into a space, really she does 0:01:59.440 --> 0:02:01.960 not any stone on turn. I found this to be 0:02:02.040 --> 0:02:05.600 really interesting conversation, and I think you will also, so, 0:02:05.720 --> 0:02:11.000 with no further ado, my conversation with NBC's Gretchen Morgansen. 0:02:11.680 --> 0:02:14.880 So let's talk a little bit about your kind of 0:02:14.960 --> 0:02:18.200 interesting career. You start as an assistant editor at Vogue 0:02:18.240 --> 0:02:21.440 magazine in the late seventies. How do you go from 0:02:21.480 --> 0:02:23.880 that to being a financial columnist? 0:02:24.240 --> 0:02:27.240 Okay, well, first of all, assistant editor is a little strong. 0:02:27.560 --> 0:02:32.040 I was a secretary, and I got the job because 0:02:32.080 --> 0:02:35.160 I could type more than thirty five words a minute. Okay, 0:02:35.600 --> 0:02:38.520 So I was just out of college, brand new to 0:02:38.639 --> 0:02:42.399 New York. I had graduated from a small liberal arts 0:02:42.400 --> 0:02:45.520 college in the Midwest, and my eyes were as big 0:02:45.560 --> 0:02:48.280 as saucers as I came into New York. It was 0:02:48.320 --> 0:02:50.600 the only job I could get. I wanted to be 0:02:50.639 --> 0:02:54.359 a journalist. This was back in the Watergate days, and 0:02:54.919 --> 0:02:57.359 you know, it was kind of exciting to think about 0:02:57.480 --> 0:03:01.919 possibly being a reporter. So that's my idea. Of course, 0:03:02.320 --> 0:03:06.720 the silence from my job applications to the New York Times, 0:03:06.840 --> 0:03:10.440 to Daily News, you name it was it was the 0:03:10.560 --> 0:03:14.079 silence was deafening. So Vogue was it? 0:03:14.400 --> 0:03:17.000 So you didn't stay a secretary of Vogue for very 0:03:17.040 --> 0:03:17.799 long though. 0:03:18.120 --> 0:03:20.480 Well, I sort of worked my way up, if you 0:03:20.480 --> 0:03:22.959 can call it that, to writing their personal finance column, 0:03:23.320 --> 0:03:26.320 which nobody read, by the way, at Vogue. 0:03:26.400 --> 0:03:29.040 At Vogue, why they just wanted to have a little Hey, 0:03:29.639 --> 0:03:31.519 let's speak to women in our magazine. 0:03:31.680 --> 0:03:34.480 Yes, so I think they sold it against an ad page, 0:03:34.520 --> 0:03:36.880 to be honest with you. But anyway, so it was 0:03:37.040 --> 0:03:41.600 very you know, basic instruction, and I really enjoyed doing that. 0:03:41.640 --> 0:03:44.240 And so I interviewed people, met a lot of folks, 0:03:44.240 --> 0:03:47.839 and then I was making very ten thousand dollars a year. 0:03:48.080 --> 0:03:51.200 That's big money in the seven No really, not really, 0:03:51.640 --> 0:03:54.800 that wasn't even big money in the fifties years. Yeah, 0:03:54.800 --> 0:03:57.640 thing is that? Is that what led you to your 0:03:57.680 --> 0:03:58.840 interest in Wall Street? 0:03:58.920 --> 0:04:01.200 Yes, so I said to myself, I don't have a 0:04:01.320 --> 0:04:04.760 rich dad, I don't have a rich husband. I'm going 0:04:04.800 --> 0:04:06.440 to have to make it on my own, and so 0:04:06.520 --> 0:04:10.240 what can I do? At about that time, Wall Street 0:04:10.400 --> 0:04:15.760 was battling a sex discrimination case with the EEOC. They 0:04:15.800 --> 0:04:18.520 had not hired enough women on the street this is 0:04:18.560 --> 0:04:19.480 the early eighties. 0:04:19.480 --> 0:04:22.520 Returned, Oh, thank goodness that got resolved. Yeah, now that 0:04:22.560 --> 0:04:23.880 we have gender parody. 0:04:24.520 --> 0:04:26.880 Well not quite, but it's better than it was anyways, 0:04:27.040 --> 0:04:29.240 definitely better. So they had to hire they had to 0:04:29.240 --> 0:04:32.479 start hiring women because they lost that case. And so 0:04:32.680 --> 0:04:36.640 I applied to the big brokerage firms as a salesman 0:04:37.240 --> 0:04:41.360 Dean Witter, Merrill Lynch Prudential Base at the time, and 0:04:42.279 --> 0:04:44.720 I got a job at Dean Witter. And the reason 0:04:44.760 --> 0:04:48.320 I got the job was because I killed it on 0:04:48.440 --> 0:04:49.159 the phone test. 0:04:50.000 --> 0:04:53.800 Really, well, you had been doing some journalism beforehand, so 0:04:53.839 --> 0:04:57.480 you're not afraid to ask people questions, right, So this 0:04:57.520 --> 0:05:00.320 is in the eighties and the beginning of the huge 0:05:00.320 --> 0:05:03.080 bull market, not that anyone knew in eighty two that 0:05:03.160 --> 0:05:05.160 strap yourself in the next eighteen years are going to 0:05:05.200 --> 0:05:05.920 be a rocket ship. 0:05:05.960 --> 0:05:08.160 Wait wait, wait. When I sat down in my chair 0:05:08.200 --> 0:05:11.919 at Dean Witter Reynolds, the Dow Jones Industrial average was 0:05:11.920 --> 0:05:13.400 at seven hundred and eighty one. 0:05:13.360 --> 0:05:15.440 Still under a thousand. That's unbelievable. 0:05:15.960 --> 0:05:18.159 So by the way, it made it hard to sell 0:05:18.200 --> 0:05:21.359 stocks because people were still in the looking backward phase. 0:05:21.400 --> 0:05:25.000 They weren't looking forward. But August nineteen eighty two, you're 0:05:25.000 --> 0:05:26.120 too young to remember that. 0:05:26.200 --> 0:05:28.280 Oh no, I have a vivid recollection. 0:05:28.120 --> 0:05:31.839 Was when the turn came and it was sort of like, okay, 0:05:31.880 --> 0:05:34.640 stocks are way too cheap. This is where you want to. 0:05:34.640 --> 0:05:37.280 Be seven pe back then, right seven. 0:05:37.120 --> 0:05:39.719 Pe on the SMP, and it was, you know, that 0:05:39.839 --> 0:05:42.680 was the turning point. So I was really well positioned 0:05:43.200 --> 0:05:43.839 for that move. 0:05:44.440 --> 0:05:47.280 And you stayed at Dean Water for what three four years? 0:05:47.279 --> 0:05:48.000 How long were you there? 0:05:48.000 --> 0:05:51.599 I stayed three years. I lived through the bear market 0:05:51.640 --> 0:05:54.600 that you don't remember of nineteen eighty three in tech 0:05:54.640 --> 0:05:58.599 stocks when there were this sort of you know, initial 0:05:58.640 --> 0:06:02.680 phase of personal computters and computing was becoming big, and 0:06:02.720 --> 0:06:04.520 they just got way ahead of themselves. 0:06:04.360 --> 0:06:07.960 Even calling them tech stocks back then, what was the phrase, you. 0:06:07.920 --> 0:06:10.400 Know, I don't know. I think it was text stocks. 0:06:10.480 --> 0:06:11.480 I mean, anyway, so. 0:06:11.520 --> 0:06:13.000 I don't recall that bear market. 0:06:13.080 --> 0:06:15.400 Yes, it was bad, it was vicious. It was over 0:06:15.440 --> 0:06:18.599 the summer of nineteen eighty three, and so I learned 0:06:18.600 --> 0:06:22.160 the hard way what happens when the stocks that you 0:06:22.240 --> 0:06:25.479 recommended to people because your firm was saying they would 0:06:25.520 --> 0:06:28.880 be goodbyes go down and those people lose money. 0:06:29.040 --> 0:06:31.359 And I felt bad. It was just not in the 0:06:31.400 --> 0:06:32.240 next six months. 0:06:32.279 --> 0:06:34.479 That's you know, they were ahead of themselves. You know, 0:06:34.960 --> 0:06:37.800 the euphoria, the momentum was getting too. 0:06:38.400 --> 0:06:39.800 Was there euphoria in eighty three? 0:06:39.960 --> 0:06:42.880 Yeah? Sure, no kidding, Oh yeah, Eagle Computer. I mean, 0:06:42.920 --> 0:06:45.760 some of these things were high flyers. And so when 0:06:45.800 --> 0:06:48.560 you had customers calling you up and saying, oh my gosh, 0:06:48.560 --> 0:06:50.680 what happened to all my money? It was such a 0:06:50.760 --> 0:06:54.600 huge trauma for me. I really felt bad, and I 0:06:54.640 --> 0:06:56.800 sort of felt like, if you have too much of 0:06:56.839 --> 0:07:00.000 a capacity for guilt, maybe not the right business. 0:07:00.520 --> 0:07:02.520 So is that what set you back into journalists? 0:07:02.520 --> 0:07:05.400 That's what sent me back. However, I did have it 0:07:05.560 --> 0:07:08.120 are I was now armed with a lot of information 0:07:08.320 --> 0:07:10.280 about how the world works on Wall Street. 0:07:10.440 --> 0:07:12.400 So that's exactly where I was going to go next. 0:07:12.480 --> 0:07:16.240 You have a knack for finding some of Wall Street's 0:07:16.400 --> 0:07:20.920 shadier operations. You've done this your whole career. How important 0:07:21.120 --> 0:07:25.400 was working as a broker to giving you insight of, Hey, 0:07:25.400 --> 0:07:27.280 here's how this stuff really works. 0:07:27.400 --> 0:07:31.560 Very important, very I mean you really saw the inner workings. 0:07:31.880 --> 0:07:33.880 You know, how the sausage is made, as they say, 0:07:34.280 --> 0:07:38.480 And so I would see how the over the counter desk, 0:07:38.920 --> 0:07:42.840 over the counterstock desk would push stocks and you know, 0:07:43.040 --> 0:07:46.040 encourage brokers to sell them, put a lot of commission 0:07:46.080 --> 0:07:49.600 in them to move them because some big seller was 0:07:49.600 --> 0:07:52.440 coming into the market. And you know, it just struck me. 0:07:52.600 --> 0:07:55.000 There were a couple of things about it that I 0:07:55.080 --> 0:07:58.480 just kept seeing how it really was. The customer was 0:07:58.600 --> 0:08:01.880 not being put first, and there were, of course the 0:08:01.960 --> 0:08:07.000 conflicted analysts that I then wrote about years later. I 0:08:07.080 --> 0:08:10.800 saw that firsthand and was, you know, my customers were 0:08:10.840 --> 0:08:12.200 harmed by that as well. 0:08:12.320 --> 0:08:14.920 So let's put a little sunshine. Let's put a little 0:08:14.960 --> 0:08:18.600 lipstick on this pig here it is. It's forty years later, 0:08:19.720 --> 0:08:23.120 the fiduciary side of the street, which was tiny in 0:08:23.160 --> 0:08:26.440 the eighties, is now not only large, but one of 0:08:26.480 --> 0:08:30.040 the fastest growing segments. While we're not even remotely close 0:08:30.120 --> 0:08:34.120 to gender parody, it's certainly better than it was. 0:08:34.559 --> 0:08:36.320 It's better than it was to spare. You don't have 0:08:36.440 --> 0:08:41.000 strippers coming in for people's birthday parties like I saw 0:08:41.320 --> 0:08:42.480 when I was a broker. 0:08:42.520 --> 0:08:43.760 Okay, unbelievable. 0:08:43.800 --> 0:08:45.640 Yeah, yeah, I saw it with my own eyes. 0:08:45.760 --> 0:08:49.640 I tell people who are the younger guys in the office, 0:08:50.000 --> 0:08:53.000 go watch boiler Room, go watch Wolf of Wall Street. 0:08:53.480 --> 0:08:56.880 They it's cinema verite. It just rings so and that 0:08:56.960 --> 0:09:00.640 world is gone. It's like the bad part. It's good 0:09:00.640 --> 0:09:03.120 that it's gone. But there were some good aspects of that, 0:09:03.720 --> 0:09:07.199 Like there were training programs. They taught people what's a stock, 0:09:07.280 --> 0:09:09.760 what's a bond. They used to do that at the 0:09:09.760 --> 0:09:13.079 bigger firms. Those are like tiny classes. Now, oh really, 0:09:13.160 --> 0:09:14.920 they don't do that anymore. Yeah, they do it, but 0:09:15.080 --> 0:09:18.480 just not what it was. So around the same time 0:09:19.520 --> 0:09:24.840 you transition from Wall Street to journalism, the LBL boom 0:09:25.040 --> 0:09:29.200 starts to take off. It becomes all the rage. What 0:09:29.240 --> 0:09:31.920 were you thinking at the time, Hey, I'm gonna write 0:09:31.920 --> 0:09:35.320 a book in forty years or were you thinking this 0:09:35.440 --> 0:09:38.480 is interesting or here comes problems? How did you see 0:09:38.520 --> 0:09:39.080 it back then? 0:09:39.920 --> 0:09:42.440 Back then? You know, it really just looked like a 0:09:42.600 --> 0:09:47.640 very reasonable response to a decade or so of undervalued stocks, 0:09:47.720 --> 0:09:50.760 right the nineteen seventies stocks were in the tank, you know, 0:09:50.920 --> 0:09:55.120 the death of equities, you remember to cover, and so 0:09:55.400 --> 0:09:59.120 it looked like it was really a pretty reasonable reaction 0:09:59.400 --> 0:10:02.800 to what had been years of undervalue in the stock market. 0:10:03.000 --> 0:10:07.560 So the initial phase of LBOs were not as not 0:10:07.679 --> 0:10:11.480 as pernicious as they are now because they were actually 0:10:12.000 --> 0:10:17.680 taking over companies that had value. You know, they're sitting 0:10:17.720 --> 0:10:20.080 there in the stock price that you could see, like 0:10:20.120 --> 0:10:23.440 you mentioned the seven price earnings ratio. Yeah, so it 0:10:23.480 --> 0:10:26.280 really was a little it was reasonable, It made sense. 0:10:26.360 --> 0:10:29.160 It was a natural kind of outcome of what had 0:10:29.200 --> 0:10:29.920 happened before. 0:10:30.400 --> 0:10:34.319 So we're going to talk a lot more about the book. 0:10:34.360 --> 0:10:38.240 These are the plunderers, but I have to mention the 0:10:38.360 --> 0:10:41.400 run of names that you really focus on in the book. 0:10:41.559 --> 0:10:44.520 These obviously aren't all of private equity. There's a whole 0:10:44.520 --> 0:10:48.959 lot hundreds of other companies, but Apollo, Blackstone, Carlisle and 0:10:49.040 --> 0:10:52.960 KKR really seems to be the key focus. Is it 0:10:53.040 --> 0:10:56.840 their size, their sector, the way they practice their business? 0:10:56.840 --> 0:10:59.240 What led you to those four? 0:11:00.040 --> 0:11:02.960 Well, it's their size first, Barry. I mean, these are 0:11:03.040 --> 0:11:06.480 the leaders of the pack. These are the folks that 0:11:06.679 --> 0:11:10.120 and the firms that set the tone, lead the way 0:11:11.320 --> 0:11:15.320 other people mimic them. I mean, KKR was behind the 0:11:15.320 --> 0:11:19.040 big Cahuna deal of the nineteen late nineteen eighties, r 0:11:19.120 --> 0:11:22.880 j R Nibisco. So this is a group of firms 0:11:22.920 --> 0:11:27.120 and people that really were there at the creation of 0:11:27.200 --> 0:11:30.560 what we now call private equity, and they do it 0:11:30.640 --> 0:11:34.000 in such size and in such scope that they have 0:11:34.360 --> 0:11:37.600 enormous impact. And that's why we're focusing on them. Yes, 0:11:37.720 --> 0:11:40.840 there are many, many private equity firms, but these really 0:11:40.880 --> 0:11:42.760 are the folks who set the tone. 0:11:42.960 --> 0:11:47.200 And you mentioned barbarians at the Gate in the book, 0:11:47.360 --> 0:11:53.120 which focused on the KKR takeover of RJR Nimbisco. That 0:11:53.720 --> 0:11:58.000 was sort of unfathomable at the time that someone could 0:11:58.280 --> 0:12:04.199 buy a giant publicly traded company strictly with low cost debt. 0:12:05.000 --> 0:12:08.439 Did that change the game going forward at that Once 0:12:09.440 --> 0:12:12.480 r J or Nabisco was in play, does that mean 0:12:12.679 --> 0:12:15.679 anybody is in play? How did that affect what took 0:12:15.720 --> 0:12:17.000 place over the next few decades. 0:12:17.080 --> 0:12:20.600 Yeah, and it also concerned Congress, as you remember, they 0:12:20.640 --> 0:12:22.360 had hearings about it. I mean, it was such a 0:12:22.400 --> 0:12:25.559 gargantuan deal at the time that it really made a 0:12:25.600 --> 0:12:28.079 lot of people nervous. And you know, there were studies 0:12:28.160 --> 0:12:32.800 done about what these deals would mean for workers, for pensions, 0:12:33.480 --> 0:12:37.199 and it really was sort of the beginning of questioning 0:12:37.440 --> 0:12:40.040 what the impact of these deals would be. But they 0:12:40.160 --> 0:12:43.400 just kept going, kept going, and there really was a 0:12:43.480 --> 0:12:47.080 sense during the late eighties, especially after the crash of 0:12:47.160 --> 0:12:51.680 nineteen eighty seven, that we really don't want to meddle 0:12:51.720 --> 0:12:55.560 with this. Let's just let the market take its course. 0:12:56.080 --> 0:12:58.760 In fact, I think Secretary of the Treasury at the 0:12:58.800 --> 0:13:02.440 time said the Mark it will, you know, work out 0:13:02.559 --> 0:13:05.040 these things and they will not become a problem. 0:13:05.360 --> 0:13:08.440 Yeah, the market always works these things out eventually, but 0:13:08.520 --> 0:13:12.000 that eventually can take longer right then expected. You mentioned 0:13:12.040 --> 0:13:14.960 they had a big impact, and they had a large 0:13:15.000 --> 0:13:18.160 effect that they also generated a lot of fees and 0:13:18.240 --> 0:13:21.240 a lot of moneies. What were the dollars like for 0:13:21.320 --> 0:13:23.640 these mega deals like r j AR Nibisco. 0:13:24.200 --> 0:13:26.839 Well, at the time, it sounded big but if you 0:13:26.880 --> 0:13:28.520 look back on it now, I don't know. I think 0:13:28.520 --> 0:13:30.240 there was there's a number we have in the book, 0:13:30.240 --> 0:13:33.240 maybe seventy million dollars or something in fees tokake care. 0:13:33.280 --> 0:13:35.400 I mean, that's like not even around the right, that's 0:13:35.440 --> 0:13:37.560 pocket chat, that's not that's walking around money. 0:13:37.640 --> 0:13:38.280 Right. 0:13:38.640 --> 0:13:41.640 So, you know, it's just gotten so so so much 0:13:41.679 --> 0:13:44.840 bigger erys as you know, the markets and the capitol 0:13:44.880 --> 0:13:46.440 pools have gotten so much bigger. 0:13:46.880 --> 0:13:50.480 Well we'll talk a little bit later about how as 0:13:50.520 --> 0:13:53.280 these companies got bigger, Wall Street got bigger, and it's 0:13:53.360 --> 0:13:56.480 kind of created a void underneath. But it's really really 0:13:56.520 --> 0:13:59.960 interesting to see where all this began at a time 0:14:00.040 --> 0:14:02.640 and when nobody really wanted a lot of these companies. 0:14:02.679 --> 0:14:05.280 They were some of these firms were, you know, all 0:14:05.320 --> 0:14:09.280 but left for debt. So you start the book with 0:14:09.400 --> 0:14:11.840 the line that kind of cracked me up. Let the 0:14:11.960 --> 0:14:16.520 looting begin. So let's start there. Where did this all begin? 0:14:16.640 --> 0:14:19.760 And when did it move from hey, we're going to 0:14:19.800 --> 0:14:22.680 help finance these companies that can't seem to get finance 0:14:23.200 --> 0:14:26.240 to full on piracy and looting. 0:14:27.200 --> 0:14:30.400 Well, there are a couple of things that happen early 0:14:30.440 --> 0:14:34.880 on that sort of you see the beginnings of that. 0:14:35.040 --> 0:14:39.160 These are that these takeovers are not only designed to 0:14:39.280 --> 0:14:44.280 find companies that are maybe undervalued or underperforming, we can 0:14:44.320 --> 0:14:47.400 whip them into shape and then sell them later. That 0:14:47.800 --> 0:14:52.280 while they're doing that, while they're monitoring them, while they 0:14:52.360 --> 0:14:57.560 are looking at them, streamlining them, you know, improving their operations, 0:14:58.320 --> 0:15:01.400 there are a lot of fees to be extracted from 0:15:01.440 --> 0:15:07.240 these companies. So for starters, private equity firms will often 0:15:07.440 --> 0:15:12.760 put people on the company's board, and sometimes those board 0:15:12.840 --> 0:15:18.680 memberships will deliver earnings to those board members. Okay, you 0:15:18.800 --> 0:15:23.200 also had this thing called monitoring fees, where a company 0:15:23.240 --> 0:15:26.640 that was purchased by a private equity fund or firm 0:15:27.480 --> 0:15:32.720 would have to pay the firm fees for its monitoring, 0:15:32.800 --> 0:15:36.800 for its oversight, for its management expertise that it was 0:15:36.920 --> 0:15:41.240 providing to the company. Now, that makes sense because you know, 0:15:41.400 --> 0:15:46.120 they took over the company. There's presumably plus they're presumably 0:15:46.680 --> 0:15:49.560 very good at managing, and they know what they're doing, 0:15:49.640 --> 0:15:51.760 and they have a goal of selling it, you know, 0:15:51.800 --> 0:15:56.200 at a profit later. However, the monitoring fees had this 0:15:56.680 --> 0:16:01.600 really kind of abusive element to them. They typically structured 0:16:02.080 --> 0:16:05.520 as ten year contracts, so the company would agree to 0:16:05.560 --> 0:16:09.320 pay over ten years a certain amount of monitoring fees 0:16:09.400 --> 0:16:11.920 every year to the private equity. 0:16:11.600 --> 0:16:14.200 Firm, regardless of profitability or. 0:16:14.240 --> 0:16:17.960 Oh yes, no, it was absolutely de rigor. They did 0:16:18.000 --> 0:16:21.640 it every year top line. So if the private equity 0:16:21.640 --> 0:16:27.120 firm sold the company after five years, the company still 0:16:27.160 --> 0:16:30.560 had to pay, still had to cough up the remaining 0:16:31.160 --> 0:16:36.640 five year contractual obligation of paying those monitorings. 0:16:36.640 --> 0:16:40.080 Now, wouldn't that just whoever's a purchaser knows this is happening. 0:16:40.520 --> 0:16:43.840 Doesn't that just lower the cost the purchase price by 0:16:43.880 --> 0:16:46.800 that much? Maybe it's a liaity on the books, but. 0:16:46.800 --> 0:16:50.160 Still it goes to these people. It is money for nothing. 0:16:50.240 --> 0:16:51.280 It's good to be the case. 0:16:51.400 --> 0:16:54.720 They are not doing the monitoring, and yet they're being 0:16:54.800 --> 0:16:56.320 paid to do the monitoring. 0:16:56.560 --> 0:16:59.120 So there are other fees like that that just sort 0:16:59.120 --> 0:17:02.880 of away at the stability of a company. 0:17:04.400 --> 0:17:09.000 Well I think I'm trying to think, oh well, okay, Well, 0:17:09.040 --> 0:17:12.520 first of all, the big fee that really ends up 0:17:12.600 --> 0:17:15.480 and this is not a fee to the private equity firm. 0:17:15.520 --> 0:17:18.840 But the big problem with many of these deals is 0:17:18.960 --> 0:17:22.800 the debt interest costs. Okay, so when the private equity 0:17:22.800 --> 0:17:26.160 firm takes over a company, they pile on a lot 0:17:26.200 --> 0:17:31.240 of debt on the company. It's expenses increase dramatically to 0:17:31.359 --> 0:17:37.640 pay those debt expenses, and oftentimes the companies will extract 0:17:37.760 --> 0:17:41.639 the firms, I mean, will extract money in the form 0:17:41.680 --> 0:17:48.480 of what's called dividend recapitalizations. They will load the company 0:17:48.480 --> 0:17:53.000 with debt and then they'll take money out almost immediately, 0:17:53.600 --> 0:17:57.399 and that's just kind of a way of stripping the 0:17:57.480 --> 0:17:58.560 company of well. 0:17:58.560 --> 0:18:01.000 In other words, when you say that they load the 0:18:01.040 --> 0:18:04.080 company with debt, they're borrowing a lot of capital. So 0:18:04.200 --> 0:18:06.639 now the company is sitting with this cash with an 0:18:06.680 --> 0:18:11.080 offsetting liability, meaning the company that's been purchased and the 0:18:11.200 --> 0:18:15.000 pe owner slash manager will take fees out of that. 0:18:15.320 --> 0:18:18.280 Well, they take the dividend recapitalization, meaning that they take 0:18:18.320 --> 0:18:21.320 a portion of what debt they've raised in cash for 0:18:21.400 --> 0:18:23.560 themselves as a payout to themselves. 0:18:23.600 --> 0:18:26.600 And who's lending this money to the company. 0:18:27.040 --> 0:18:31.560 The banks could be Wall Street, could be private debt folks, but. 0:18:31.640 --> 0:18:34.880 It's this is very often securitized and sold off into 0:18:34.880 --> 0:18:35.280 the market. 0:18:35.480 --> 0:18:40.160 It can be collateralized loan obligations. Now it's big private debt. 0:18:40.520 --> 0:18:44.080 But so you had these dividend recaps. In two thousand 0:18:44.119 --> 0:18:49.000 and seven, firms extracted the private equity firms extracted twenty 0:18:49.240 --> 0:18:53.800 billion dollars from companies in the form of dividend recapitalizations, 0:18:54.440 --> 0:18:59.280 and by twenty twenty one they were extracting seventy billion 0:18:59.560 --> 0:19:03.920 in div and recapitalizations. Now that's money that a company 0:19:03.960 --> 0:19:07.200 has to pay back, right the debt that was raised 0:19:07.359 --> 0:19:08.040 to cover it. 0:19:07.960 --> 0:19:10.080 And it's not going into what the company's doing. 0:19:10.040 --> 0:19:13.040 And it's not going into the company's operations, and it 0:19:13.119 --> 0:19:16.400 has an interest cost associated with it. So that's another 0:19:16.920 --> 0:19:19.440 piece of the puzzle that I think is worth. 0:19:20.200 --> 0:19:24.119 So we talked earlier about RJ or Nibisco. When you 0:19:24.280 --> 0:19:27.440 look at the history of the eighties and even nineties 0:19:27.520 --> 0:19:32.120 era LBOs, they seem to be a lot of lesser known, 0:19:32.359 --> 0:19:39.600 not necessarily consumer facing companies, transport and logistics and manufacturing 0:19:39.920 --> 0:19:42.680 like r JR is kind of one of the first 0:19:43.320 --> 0:19:48.360 names that the average person would know. How did that 0:19:48.440 --> 0:19:52.440 transition take place? What were most of the eighties era 0:19:52.680 --> 0:19:56.119 LBOs focused on. These were really way under the radar 0:19:56.200 --> 0:19:58.800 sort of things. It's only later, or at least in 0:19:58.840 --> 0:20:01.960 the book you described that it's only later that it's 0:20:02.000 --> 0:20:07.320 household brands and retailers and names we know. Explain that 0:20:07.359 --> 0:20:08.320 a little bit if you would. 0:20:09.000 --> 0:20:11.000 Well, I think what was going on again we talked 0:20:11.000 --> 0:20:13.200 a little bit about this earlier, is that these were 0:20:13.320 --> 0:20:16.119 the companies that were most undervalued. Remember, we were coming 0:20:16.160 --> 0:20:20.440 out of a very bad recession, and so probably what 0:20:20.480 --> 0:20:23.480 you had at that time, or you know, the industrial 0:20:23.520 --> 0:20:27.400 companies were the ones that were harmed, you know, very 0:20:27.520 --> 0:20:30.760 very much by the recession, and so their price earnings 0:20:30.840 --> 0:20:33.520 ratios were probably below the S and P average of seven, 0:20:34.000 --> 0:20:36.280 and so that might have been why they were taking 0:20:36.320 --> 0:20:39.640 over and focusing more on them. But again, as this 0:20:39.960 --> 0:20:44.040 practice and process sort of morphed into something else, it 0:20:44.119 --> 0:20:48.359 became more about some of the big name companies that 0:20:48.400 --> 0:20:51.560 you know. Now. A big pivotal moment was when the 0:20:51.640 --> 0:20:55.960 junk bond market crashed in the early nineties. This was 0:20:56.000 --> 0:21:00.600 after the SNL crisis. SNL's had been persued to buy 0:21:00.640 --> 0:21:05.159 a lot of junk bonds. The market turned. Milkin and 0:21:06.000 --> 0:21:11.520 Drexel Burnham collapsed and failed. So you had this huge 0:21:11.640 --> 0:21:15.560 market maker and junk bonds disappear. Junk bond market went 0:21:15.840 --> 0:21:20.200 really into the toilet, and that also then created a 0:21:20.280 --> 0:21:24.160 lot of distress in the market for companies that had 0:21:24.240 --> 0:21:27.480 borrowed from the junk bond market, and now you had 0:21:27.520 --> 0:21:31.560 those companies trading at very low prices. So again it 0:21:31.640 --> 0:21:35.439 was a distress situation that these companies took advantage of. 0:21:36.160 --> 0:21:40.720 So how do you draw a distinction between LBO brands 0:21:40.760 --> 0:21:45.320 of private equity, the thing that some people call vulture capitalism, 0:21:46.000 --> 0:21:51.280 and credible mid market banking and merchant banking that is 0:21:51.320 --> 0:21:54.800 really one of the few sources of capital for these 0:21:54.920 --> 0:21:59.680 mid sized companies. Given that Wall Street started chasing all 0:21:59.680 --> 0:22:00.240 the big. 0:22:00.160 --> 0:22:03.440 Firms, Well, I think you know, there is a right 0:22:03.480 --> 0:22:05.760 way and the wrong way to do this business, and 0:22:05.960 --> 0:22:09.840 certainly there are many firms doing the right thing. As 0:22:09.880 --> 0:22:15.200 far as what that might mean, Okay, less debt. Okay, 0:22:15.000 --> 0:22:18.600 the debt that is levied onto these companies is can 0:22:18.640 --> 0:22:21.760 be very damaging. And right now, Barry, we're going through 0:22:21.800 --> 0:22:25.760 a period of rising interest rates and companies are experiencing 0:22:25.840 --> 0:22:31.160 distress because much of this debt is floating, it's not fixed. 0:22:31.640 --> 0:22:34.199 And so what you need to remember is that the 0:22:34.280 --> 0:22:39.520 costs associated with borrowing money as a company when interest 0:22:39.600 --> 0:22:42.720 rates are zero is a different story than when interest 0:22:42.800 --> 0:22:45.960 rates are five so that is a huge part of 0:22:46.000 --> 0:22:48.600 the puzzle. So how about putting a little more equity 0:22:48.920 --> 0:22:52.760 into these deals instead of so much debt. How about 0:22:52.760 --> 0:22:55.480 putting more of your own skin in the game kind 0:22:55.480 --> 0:22:58.560 of a thing. And I think, you know, the massive 0:22:58.720 --> 0:23:02.480 layoffs that often occur her are very detrimental. I think 0:23:02.520 --> 0:23:07.800 that the asset stripping that has also occurred. Pensions, for instance, 0:23:07.960 --> 0:23:12.840 are sold off. Overfunded pensions get sold off and that goes, 0:23:12.960 --> 0:23:15.680 you know, into the private equity firm instead of into 0:23:15.720 --> 0:23:19.760