WEBVTT 00:02.060 --> 00:04.230 Professor Robert Shiller: Well, 00:04.234 --> 00:07.414 I have the pleasure of introducing to you today Stephen 00:07.408 --> 00:10.398 Schwarzman, who has kindly agreed to 00:10.399 --> 00:12.069 lecture our class. 00:12.070 --> 00:17.510 Mr. Schwarzman graduated from Yale 00:17.511 --> 00:21.661 in 1969. He was at Davenport College. 00:21.660 --> 00:23.960 Do we have any Davenport people here? 00:23.960 --> 00:27.570 A few, not a lot. 00:27.570 --> 00:33.610 He graduated then from Harvard Business School in 1972. 00:33.610 --> 00:37.910 He worked for Lehman Brothers as--I don't know if it was his 00:37.914 --> 00:40.764 first job, but one of his first jobs, 00:40.760 --> 00:44.600 and became Managing Director at Lehman Brothers at age 00:44.595 --> 00:48.645 thirty-one and he became head of their Global Mergers and 00:48.647 --> 00:50.237 Acquisitions team. 00:50.240 --> 00:53.560 In 1985, Mr. Schwarzman, with Peter 00:53.557 --> 00:59.797 Peterson, founded the Blackstone Group, which has become the lead 00:59.802 --> 01:03.122 manager of alternative assets. 01:03.119 --> 01:06.359 In some sense, what he does and what David 01:06.364 --> 01:09.774 Swensen does, whom we had heard from earlier 01:09.766 --> 01:12.216 this semester, are similar. 01:12.219 --> 01:18.249 They're both looking at unusual and different investment assets 01:18.253 --> 01:23.123 and they are both very successful in doing this. 01:23.120 --> 01:26.540 Mr. Schwarzman's firm has had a 01:26.537 --> 01:32.577 return on private equity investments of 23% a year for 01:32.575 --> 01:38.495 the last--on average--for the last twenty years. 01:38.500 --> 01:42.450 This is a little bit in excess of David Swensen, 01:42.452 --> 01:47.752 but I think we have to put them both as remarkable investors. 01:47.750 --> 01:53.320 In the real estate group at Blackstone, they've had 30% a 01:53.320 --> 01:58.990 year for the last fifteen years and this is after fees. 01:58.989 --> 02:06.059 Blackstone Group has been very much in the news recently. 02:06.060 --> 02:11.970 It just came out that they are apparently going to be buying 02:11.972 --> 02:17.382 $12.5 billion dollars of leveraged loans from Citigroup 02:17.384 --> 02:19.794 at a steep discount. 02:19.789 --> 02:23.669 So, apparently they've seen a profit opportunity there or 02:23.670 --> 02:27.970 they're supporting our economy from the ravages of the subprime 02:27.967 --> 02:30.127 crisis. Also in the news, 02:30.134 --> 02:34.934 China has announced that it plans to buy $3 billion dollars 02:34.925 --> 02:39.955 stake in Blackstone Group as its first effort to diversify its 02:39.964 --> 02:44.594 $1.2 trillion dollars of foreign exchange reserves. 02:44.590 --> 02:48.810 So, the Blackstone Group was picked by the Chinese government 02:48.814 --> 02:53.254 as the most fitting place for it to put some of its reserves. 02:53.250 --> 02:56.100 With that, I will leave it to Mr. 02:56.099 --> 02:59.749 Schwarzman, who will speak for a while. 02:59.750 --> 03:02.270 Mr. Stephen Schwarzman: Well, 03:02.265 --> 03:06.575 thank you very much for coming out on what's a bit of dreary, 03:06.579 --> 03:08.519 slightly rainy morning. 03:08.520 --> 03:13.490 When I was an undergraduate, you wouldn't have gotten much 03:13.492 --> 03:16.672 of an attendance; people would have been sleeping 03:16.673 --> 03:20.313 in. So, it's awful nice of you to 03:20.311 --> 03:23.441 be here. There are some dramatic 03:23.444 --> 03:28.654 differences from when I was an undergraduate and you are. 03:28.650 --> 03:33.950 One of the first differences is that this course wouldn't have 03:33.946 --> 03:38.806 existed because no one had an interest in finance at that 03:38.808 --> 03:42.278 time. It wasn't a particularly 03:42.275 --> 03:44.285 interesting time. 03:44.289 --> 03:49.089 In the 1960s, the securities markets actually 03:49.088 --> 03:53.888 were regulated, commissions were fixed on the 03:53.886 --> 03:58.416 New York Stock Exchange; so, it was very difficult to 03:58.417 --> 03:59.787 find some way to compete. 03:59.789 --> 04:04.199 It was sort of rigged system, if you will, 04:04.200 --> 04:06.460 and it wasn't open. 04:06.460 --> 04:13.680 So, there was very little to no interest, really, 04:13.675 --> 04:19.625 in finance. There really wasn't an 04:19.629 --> 04:28.719 SOM--School of Management--at Yale at that point. 04:28.720 --> 04:34.390 Business generally was utterly unfashionable. 04:34.389 --> 04:39.119 We were in the midst of the Vietnam War and business was 04:39.123 --> 04:43.943 sort of linked to the perception of that war because they 04:43.943 --> 04:49.113 supplied certain types of war materials and that was the most 04:49.107 --> 04:54.097 unfashionable thing that you could be involved with. 04:54.100 --> 04:57.940 So, there was a very anti-business, 04:57.937 --> 05:03.917 non-existent finance orientation at the school and, 05:03.920 --> 05:09.190 obviously, that's changed in the society generally, 05:09.189 --> 05:12.139 with enormous differences. 05:12.139 --> 05:17.379 As a result of when I grew up, I didn't even take an economics 05:17.379 --> 05:20.849 course at Yale. I frankly wasn't much good with 05:20.850 --> 05:24.390 math; I stopped in the eleventh grade 05:24.393 --> 05:29.893 and I think calculus was, for me, that was way too much 05:29.885 --> 05:33.925 of a reach. So, I'm more in the add, 05:33.930 --> 05:39.060 subtract, multiply, and divide kind of category, 05:39.060 --> 05:44.410 which worked and still does quite well for me. 05:44.410 --> 05:49.520 When I graduated, I was lucky enough to get a job 05:49.522 --> 05:53.572 at a firm that had just gone public. 05:53.569 --> 05:56.939 It was the first New York Stock Exchange firm that had just gone 05:56.938 --> 05:58.678 public; it was called Donaldson, 05:58.676 --> 05:59.876 Lufkin & Jenrette. 05:59.879 --> 06:06.909 Bill Donaldson actually founded the School of Management after 06:06.907 --> 06:10.687 he left DLJ. That was, because this is a 06:10.688 --> 06:15.108 financial markets course, that was quite interesting for 06:15.106 --> 06:19.686 me because I didn't even know what common stock was when I 06:19.685 --> 06:22.665 graduated. Hopefully, you will have 06:22.674 --> 06:24.834 learned more in this course. 06:24.829 --> 06:27.379 I went to DLJ--I couldn't read a financial statement, 06:27.376 --> 06:29.966 which is like going to a foreign country and not being 06:29.971 --> 06:32.611 able to speak the language; it was sort of hopeless. 06:32.610 --> 06:36.720 One of the interesting experiences I had about--which 06:36.721 --> 06:41.541 really, now that I'm a little bit older and can look backwards 06:41.543 --> 06:45.493 on financial markets, it was my first visit to a 06:45.488 --> 06:49.128 company. DLJ basically was one of the 06:49.129 --> 06:55.679 first large institutional stock managers of pension fund assets 06:55.684 --> 07:02.454 and so forth and I was allowed to go and interview a company. 07:02.449 --> 07:04.919 I had never interviewed a company executive; 07:04.920 --> 07:13.070 I read their annual report and I went up to see this gentleman 07:13.066 --> 07:17.366 and I sat there. I figured out all the things 07:17.373 --> 07:21.663 I'd want to know so that I could figure out whether I should buy 07:21.656 --> 07:24.236 his stock or invest in his company. 07:24.240 --> 07:29.130 I went through my list of questions and he wouldn't answer 07:29.132 --> 07:35.682 most of them. I found it a very frustrating 07:35.675 --> 07:39.785 experience. I went back to the office and 07:39.791 --> 07:43.341 by the time I got back to the office, Dick Jenrette, 07:43.339 --> 07:47.449 who was president of the firm, had gotten an enraged phone 07:47.454 --> 07:51.574 call from this executive and called me into his office. 07:51.569 --> 07:54.119 He said, geez you made this man very angry. 07:54.120 --> 07:56.280 I said, well how could I do that? 07:56.279 --> 08:00.219 I was just asking questions and he wasn't answering them, 08:00.224 --> 08:02.834 so I just asked the question again. 08:02.829 --> 08:06.349 I couldn't quite understand why he wasn't answering me. 08:06.350 --> 08:09.490 He said, well you were asking him things that he's not allowed 08:09.491 --> 08:11.261 to answer. I said, what do you mean? 08:11.259 --> 08:14.019 He said, well you were asking him for inside information. 08:14.019 --> 08:16.379 I said, well I don't know what inside information is; 08:16.379 --> 08:19.459 I'm just asking the question that I need to know to know to 08:19.455 --> 08:21.625 answer whether to buy the stock or not. 08:21.629 --> 08:25.479 He said, well Steve, there are all these rules of 08:25.476 --> 08:27.716 what you can ask somebody. 08:27.720 --> 08:31.540 Then if he tells you, then he has to tell everybody 08:31.544 --> 08:36.134 in the world and that's just too cumbersome, so that's why he 08:36.133 --> 08:39.033 didn't answer. I said, well if he didn't 08:39.025 --> 08:42.415 answer, how in the world can you figure out what to do? 08:42.420 --> 08:46.790 I said, I'm not that smart; I need to have all relevant 08:46.786 --> 08:50.906 data and he's the person who has it, so why won't he give it to 08:50.910 --> 08:52.960 me? It became pretty clear that I 08:52.957 --> 08:55.227 was doing the wrong thing for a living. 08:55.230 --> 09:00.800 In effect, that's the dilemma for people who want to buy 09:00.803 --> 09:02.833 liquid securities. 09:02.830 --> 09:06.720 I decided very quickly this was a bad business, 09:06.718 --> 09:11.198 certainly a bad one for me--that I couldn't figure out 09:11.198 --> 09:16.188 how I could win that game when somebody wouldn't fully share 09:16.185 --> 09:19.055 openly everything they knew. 09:19.059 --> 09:24.369 I guess if you were like a sumo with a good fashion sense, 09:24.373 --> 09:29.313 that's how you manage liquid securities and beat other 09:29.314 --> 09:31.964 people. It's not just what you know, 09:31.958 --> 09:35.488 it's a question of whether the rest of the world will buy into 09:35.485 --> 09:38.025 what you know and drive that security up. 09:38.029 --> 09:42.049 So, I basically retreated and went to Harvard Business School, 09:42.053 --> 09:45.753 where I figured maybe somebody will tell me how this game 09:45.746 --> 09:49.106 really works in a way that I can prosper in it. 09:49.110 --> 09:52.130 That was a good experience for me. 09:52.129 --> 09:55.689 They basically taught you--you're undergraduates, 09:55.694 --> 10:00.224 so you don't know what they're teaching you at the school like 10:00.224 --> 10:02.214 that--so, I can explain it actually 10:02.208 --> 10:05.008 pretty clearly. It's basically--they're 10:05.009 --> 10:10.899 teaching you that everything you do with a company has something 10:10.898 --> 10:15.318 else to do with that company, so that it's an integrated 10:15.320 --> 10:18.940 system. If you are trying to develop a 10:18.942 --> 10:23.292 product for sale, it would be good to know 10:23.293 --> 10:26.373 whether somebody wants it. 10:26.370 --> 10:28.690 What happens, actually, in the real world, 10:28.694 --> 10:31.874 is that sometimes people just get an interesting idea and 10:31.868 --> 10:34.928 they'll produce a product and nobody will want it. 10:34.929 --> 10:38.729 If you integrate all the different kinds of knowledge in 10:38.731 --> 10:43.021 the company so that you're doing intelligent things--and I know 10:43.015 --> 10:46.395 this appears very elementary--you'll have a better 10:46.402 --> 10:48.942 company. That's sort of what they were 10:48.939 --> 10:52.239 teaching and after they taught that for two or three months, 10:52.240 --> 10:55.510 I sort of got it and thought about dropping out of school 10:55.509 --> 10:57.669 because it got a little repetitive, 10:57.670 --> 11:01.370 frankly. I was convinced by my friend, 11:01.365 --> 11:04.475 Dick Jenrette, who also thought about dropping 11:04.478 --> 11:06.828 out of Harvard Business School. 11:06.830 --> 11:09.870 In December, it gets very cold in Boston and 11:09.868 --> 11:14.248 really miserable--he was going to drop out and go and get a PhD 11:14.248 --> 11:17.788 in Economics. I was going to drop out and go 11:17.787 --> 11:22.377 back to the real world and he said that his staying on was a 11:22.384 --> 11:25.894 good thing and I should stay on, so I did. 11:25.889 --> 11:30.119 What I've sort of done for a career is try and solve that 11:30.115 --> 11:34.435 problem of my initial meeting, where people will--I want 11:34.438 --> 11:39.018 people to tell me what's really going on, so I can figure out 11:39.018 --> 11:43.138 whether what they're saying makes sense or doesn't make 11:43.140 --> 11:46.670 sense. You can do that in the private 11:46.669 --> 11:50.699 equity business, which was sort of our largest 11:50.704 --> 11:53.864 business, and you can do that in the real 11:53.856 --> 11:57.876 estate business because you're allowed to get all that inside 11:57.875 --> 12:00.105 information, if you're trying to buy a 12:00.109 --> 12:03.159 company with our rules and also the rules of other countries. 12:03.159 --> 12:07.829 If you sign a confidentiality agreement that you won't use 12:07.827 --> 12:12.817 that information for any purpose other than buying the company 12:12.823 --> 12:17.033 and putting a price on it, then the shareholders get a 12:17.027 --> 12:20.777 chance to vote on whether they want the price that you give 12:20.782 --> 12:23.912 them. So, to me that was like an 12:23.906 --> 12:30.016 answer to my conundrum of how could we get all the information 12:30.020 --> 12:34.230 and then figure out what to do with it, 12:34.230 --> 12:36.610 including improving the company. 12:36.610 --> 12:40.040 I'm sure you know something about private equity. 12:40.039 --> 12:42.539 If you read the general newspapers, I'll tell you 12:42.541 --> 12:43.741 basically what it is. 12:43.740 --> 12:48.400 Well, all we do is we buy companies and that's the 12:48.401 --> 12:50.591 simplest thing we do. 12:50.590 --> 12:53.610 We do a lot of other things, but let's start with, 12:53.609 --> 12:57.429 we buy companies; we borrow money to buy those 12:57.429 --> 12:59.629 companies. Historically, 12:59.632 --> 13:05.002 it's been about three dollars of debt for every one dollar of 13:04.996 --> 13:08.726 equity. We then improve those companies 13:08.726 --> 13:14.306 through a whole variety of sort of managerial actions and then 13:14.307 --> 13:18.787 those companies grow with the general economy. 13:18.789 --> 13:21.789 Let's say--if they just grow at the regular rate of all 13:21.792 --> 13:24.462 companies, then if you're leveraged three-to-one, 13:24.462 --> 13:27.022 you're going to earn a much better return. 13:27.019 --> 13:31.159 If you take a company and can accelerate its growth so it's 13:31.164 --> 13:34.954 growing faster because you've improved it and you have 13:34.952 --> 13:40.272 three-to-one leverage, you'll get a way better return 13:40.269 --> 13:45.459 then any normal stock market kind of return. 13:45.460 --> 13:49.870 That's sort of the model of what we do in that business. 13:49.870 --> 13:55.100 As Professor Shiller was saying, we've compounded, 13:55.099 --> 13:58.689 after fees, at 23%; but before fees, 13:58.685 --> 14:03.645 because we charge a 20% part of the profits of the deal goes 14:03.646 --> 14:07.426 back to the general partners, which is us. 14:07.429 --> 14:11.939 We actually earned around 31%, which from you being in a 14:11.936 --> 14:15.786 course like this, you'd see that's really pretty 14:15.787 --> 14:20.537 high compared to a stock market average over a period, 14:20.539 --> 14:23.699 which would be around 11%, in real estate, 14:23.699 --> 14:26.549 where we do the same kind of thing. 14:26.549 --> 14:31.659 But, real estate is an easier business because buildings don't 14:31.663 --> 14:34.393 talk. Management of companies talk 14:34.394 --> 14:38.074 and you have to figure out what they're saying. 14:38.070 --> 14:43.380 Companies are very complex--you have interesting competition, 14:43.384 --> 14:46.754 you have global competition--and it's a 14:46.750 --> 14:49.230 complicated asset class. 14:49.230 --> 14:51.140 Real estate is very simple. 14:51.139 --> 14:55.569 I mean there's a--buildings don't talk, so you can't get 14:55.568 --> 14:58.678 misled by a building; they can't tell you something; 14:58.680 --> 14:59.940 they don't have a belief system. 14:59.940 --> 15:02.040 It's just there; it's on the corner; 15:02.040 --> 15:05.290 it's in the middle of the block; and there are other buildings 15:05.285 --> 15:08.345 that are either getting built or planned. 15:08.350 --> 15:12.400 You can figure out what the supply/demand is for real estate 15:12.400 --> 15:13.980 in a much easier way. 15:13.980 --> 15:18.840 Because of that, our returns in real estate have 15:18.842 --> 15:24.532 been better because it's an easier asset class and we've 15:24.532 --> 15:28.622 earned, after fees, 30% a year since we 15:28.621 --> 15:32.431 started and, before fees, close to 40%. 15:32.429 --> 15:37.829 This alternative asset class, if handled right, 15:37.826 --> 15:44.866 is really a much better way of earning money for investors as 15:44.865 --> 15:50.025 well as the general partner--let's not forget 15:50.027 --> 15:56.007 us--than regular financial markets investing. 15:56.009 --> 16:02.219 That world has been started very small. 16:02.220 --> 16:07.180 When we started it, the institutions had less than 16:07.182 --> 16:09.312 1% of their assets. 16:09.309 --> 16:13.459 It was like infinitesimal in the private equity side of the 16:13.462 --> 16:16.682 business. It's now up to about 4.5% and 16:16.679 --> 16:21.849 the returns are so much higher; you wonder why people don't 16:21.850 --> 16:26.830 give us all their money on an asset allocation basis. 16:26.830 --> 16:31.320 I actually still wonder why they don't since we put most of 16:31.317 --> 16:35.417 our money in that and we keep making more and more and 16:35.417 --> 16:39.067 outperforming. It just takes the rest of the 16:39.072 --> 16:43.602 world apparently the equivalent of your lifetime to sort of 16:43.596 --> 16:47.336 figure out exactly what they should be doing. 16:47.340 --> 16:53.630 I think the projections are that this should be growing at a 16:53.625 --> 17:00.225 lot faster rate going into the future and some institutions, 17:00.230 --> 17:04.600 like Yale, have private equity with around--I guess it's 17:04.600 --> 17:06.110 around--16%, 17%. 17:06.109 --> 17:10.459 It was up to 18% of their portfolio and that's one of the 17:10.462 --> 17:14.892 reasons why Dave Swensen has done much better than regular 17:14.893 --> 17:17.593 money managers. Turning to a different 17:17.591 --> 17:20.701 subject--it's a financial markets course and I thought it 17:20.700 --> 17:24.140 would be useful to talk to you a little bit about what's really 17:24.143 --> 17:25.923 going on in the real world. 17:25.920 --> 17:31.530 Even though this course is being recorded and whatever you 17:31.533 --> 17:37.643 say about the current moment turns out to be right or wrong, 17:37.640 --> 17:40.780 but it's just a current moment; it's such a fascinating one. 17:40.779 --> 17:44.129 You all are, I guess, somewhere between 17:44.129 --> 17:48.979 eighteen and twenty-one years old, probably nineteen and 17:48.977 --> 17:52.297 twenty-one, so you don't have the 17:52.301 --> 17:58.121 perspective to understand how really interesting and dangerous 17:58.115 --> 18:01.065 this current environment is. 18:01.069 --> 18:08.809 What's happened is that through an abnormal issuance of 18:08.808 --> 18:16.118 something called subprime securities--nobody in this 18:16.117 --> 18:20.127 audience, certainly people watching, 18:20.130 --> 18:22.530 have probably owned a house. 18:22.529 --> 18:27.159 What happened was that in the late ‘90s, 18:27.159 --> 18:33.129 the government in Washington passed a law to encourage more 18:33.126 --> 18:39.296 low-income people being able to buy houses and resulted, 18:39.299 --> 18:44.489 along with other factors, in an explosion of these types 18:44.491 --> 18:47.161 of loans. In terms of loans--and 18:47.159 --> 18:51.899 Professor Shiller can correct me if I'm slightly off on this--but 18:51.898 --> 18:55.888 in the year 2002, of the total mortgage loans 18:55.893 --> 19:01.483 that were originated for houses, probably around 2-3% of them 19:01.477 --> 19:05.847 were subprime. These are for people who don't 19:05.854 --> 19:11.724 have enough money to really pay normal principle or interest and 19:11.722 --> 19:17.592 expect their mortgage to be current--to not go into default. 19:17.589 --> 19:24.479 By 2006, this had exploded to 30% of all the mortgages that 19:24.479 --> 19:27.329 were issued that year. 19:27.329 --> 19:33.939 When you go from 2-3% to 30%, this is an almost out of body 19:33.944 --> 19:40.904 experience and to entice these people to take these loans they 19:40.900 --> 19:46.830 actually would tell somebody--in the olden days, 19:46.829 --> 19:50.409 when I was your age, to buy a house you had to put 19:50.413 --> 19:52.903 up 25% of the cost of the house. 19:52.900 --> 19:58.810 Sometimes, you'd have to put up 20% of the cost of the house and 19:58.809 --> 20:00.779 you can borrow 80%. 20:00.779 --> 20:04.799 The subprime loans--sometimes you only had to put up 3% of the 20:04.801 --> 20:07.841 cost of the house; sometimes you didn't even have 20:07.836 --> 20:08.976 to put up anything. 20:08.980 --> 20:15.120 That makes it really affordable and then you didn't have to pay 20:15.117 --> 20:18.877 any interest for two or three years. 20:18.880 --> 20:22.980 So, you put up nothing and you paid nothing, 20:22.984 --> 20:28.144 so this led to a stampede of people who wanted this. 20:28.140 --> 20:33.770 What's happening now is that the mortgage--the interest which 20:33.768 --> 20:39.208 no one--a lot of these mortgages didn't have to pay now, 20:39.210 --> 20:42.070 two to three years later you have to pay it and a lot of the 20:42.072 --> 20:44.452 people who didn't have the resources can't pay the 20:44.450 --> 20:46.710 mortgages; those mortgages are defaulting. 20:46.710 --> 20:52.160 The issue that created all the problems in the financial system 20:52.156 --> 20:57.076 that you're reading about in the front page is that these 20:57.075 --> 21:00.935 mortgages were pooled in a new security. 21:00.940 --> 21:03.910 Imagine just, sort of, a jar where somebody 21:03.913 --> 21:08.303 threw in a few thousand of these mortgages and then put the lid 21:08.302 --> 21:11.682 on it. They had these new securities 21:11.679 --> 21:17.389 and what they did is they said, well the first 83% of them must 21:17.385 --> 21:23.455 be really safe because mortgages basically hardly ever default. 21:23.460 --> 21:28.840 They rated those--the rating agencies, which tell people how 21:28.835 --> 21:33.025 secure something is, rated this as a "triple-A" 21:33.025 --> 21:35.725 security. In the world of finance, 21:35.725 --> 21:39.445 when you tell somebody that a security is triple-A--they get 21:39.450 --> 21:42.920 rated all the way from AAA's down to CCC's and CCC means 21:42.923 --> 21:46.983 something's about to blow up; AAA means there's no possible 21:46.978 --> 21:49.938 chance you're ever going to lose your money. 21:49.940 --> 21:56.250 Because 83% of this jar was rated AAA, people bought this 21:56.250 --> 22:02.900 all over the world as if it was a security that could never, 22:02.898 --> 22:05.488 ever, ever default. 22:05.490 --> 22:09.510 As you can see, these were basically mortgages 22:09.512 --> 22:14.162 made to low-income people who weren't even paying, 22:14.160 --> 22:16.450 in some cases, interest on it and the chance 22:16.450 --> 22:19.380 that these were going to default was really sky high. 22:19.380 --> 22:24.190 Historians will go back and figure out why anybody would 22:24.192 --> 22:27.782 believe that these things could be AAA. 22:27.779 --> 22:32.049 They did and they were bought everywhere; 22:32.049 --> 22:36.639 so, these securities became like American SARS. 22:36.640 --> 22:41.540 They were exported throughout the world, creating enormous 22:41.543 --> 22:46.363 problems for individual institutions around the world. 22:46.359 --> 22:49.599 In the United States, they've created what will be 22:49.596 --> 22:53.426 hundreds of billions of dollars of losses for the financial 22:53.427 --> 22:57.057 institutions. As part of Sarbanes-Oxley, 22:57.057 --> 23:02.647 which was a law passed after Enron and some other things, 23:02.650 --> 23:06.510 we've developed accounting procedures with something 23:06.513 --> 23:09.623 called--very technical--called FAS-157, 23:09.619 --> 23:11.909 which is called Fair Value Accounting. 23:11.910 --> 23:15.960 It means, before these defaults even happen, the fact that other 23:15.964 --> 23:19.894 people think they're going to happen results in the securities 23:19.890 --> 23:23.560 being worth less and you have to take a loss based on that 23:23.558 --> 23:26.768 expected value. The financial institutions were 23:26.774 --> 23:30.324 losing all this money without the defaults even happening or 23:30.324 --> 23:32.614 people knowing how bad it would be. 23:32.609 --> 23:37.059 As a result of that those large losses, the financial market 23:37.058 --> 23:40.748 started losing confidence in some of the financial 23:40.753 --> 23:45.133 institutions and different asset classes in those financial 23:45.127 --> 23:48.347 institutions. Principally banks started 23:48.347 --> 23:50.417 trading in a really bad way. 23:50.420 --> 23:54.530 People thought they were going to be forced to sell some of 23:54.530 --> 23:58.500 those and we had a variety of different asset classes, 23:58.500 --> 24:06.350 ranging from municipal bonds, basically changing their value. 24:06.349 --> 24:08.399 People said, I don't want these anymore, 24:08.396 --> 24:11.226 there were hedge funds that owned those on leverage, 24:11.230 --> 24:15.450 so there were margin calls, which forced those securities 24:15.446 --> 24:18.906 to be sold, which made them worth even less. 24:18.910 --> 24:21.590 That got the banks even more nervous. 24:21.589 --> 24:26.849 That resulted in higher-rated securities being sold that were 24:26.845 --> 24:28.505 also unleveraged. 24:28.509 --> 24:33.429 What you had was panic selling of securities rolling through 24:33.428 --> 24:38.258 every element of the financial system as people desperately 24:38.264 --> 24:43.604 tried to get out of stuff before it would become worth less. 24:43.599 --> 24:48.899 This type of rapid de-leveraging resulted in 24:48.902 --> 24:56.182 downward valuations for all these securities--a lot of hedge 24:56.177 --> 24:59.257 funds going bankrupt. 24:59.259 --> 25:03.979 Anyone with leverage borrowing more than five to one to carry 25:03.977 --> 25:06.727 some very secure real securities, 25:06.730 --> 25:09.760 not subprime, but government-oriented 25:09.764 --> 25:13.984 securities--those institutions got into trouble. 25:13.980 --> 25:18.160 What we've had is basically melt in the financial markets, 25:18.160 --> 25:22.560 where the banks have been so severely impacted that they have 25:22.559 --> 25:26.299 stopped lending to certain whole asset classes, 25:26.299 --> 25:30.529 particularly leveraged lending, which we're involved with, 25:30.533 --> 25:32.393 as well as other areas. 25:32.390 --> 25:36.900 The costs of credit have gone up, sort of, 3%, 25:36.903 --> 25:42.823 4%, which doesn't sound like much to you, but it actually in 25:42.820 --> 25:46.030 the overall system is a lot. 25:46.029 --> 25:49.739 What that's resulted in is a financial crisis. 25:49.740 --> 25:54.500 It's resulted in the Federal Reserve, who's the ultimate 25:54.499 --> 25:59.219 protector of the system, very quickly lowering interest 25:59.218 --> 26:04.068 rates--agreeing to lend huge amounts of money to the banking 26:04.072 --> 26:08.842 system because banks are now not even lending money to each 26:08.844 --> 26:11.724 other. They're sufficiently scared 26:11.717 --> 26:15.867 about what's going on and the Federal Reserve is saying, 26:15.869 --> 26:19.519 well everybody can come to me and I'll lend you all money to 26:19.517 --> 26:22.297 keep you liquid, so this whole system doesn't 26:22.301 --> 26:25.311 stop. As it impacts regular people is 26:25.313 --> 26:30.543 when the financial institutions go into a crisis like this and 26:30.535 --> 26:34.725 stop lending or reduce their lending of money. 26:34.730 --> 26:39.100 There's less money for regular people to borrow to go about 26:39.098 --> 26:41.808 their lives and businesses to get. 26:41.809 --> 26:46.989 As that starts happening, an economy will slow down and 26:46.985 --> 26:52.735 go into a recession and that's what's happening in the United 26:52.735 --> 26:55.355 States. For those of you who are 26:55.361 --> 26:58.701 graduating this year, your prospect of getting a job 26:58.701 --> 27:02.571 will be less than the people who graduated last year and the 27:02.565 --> 27:06.355 people who graduated the year before had a much better deal 27:06.364 --> 27:09.774 than the ones that were graduating last year. 27:09.769 --> 27:15.879 This is a problem that's a pretty pervasive one and it will 27:15.878 --> 27:22.088 probably take longer to get out of this recession than other 27:22.092 --> 27:24.622 ones that we've had. 27:24.619 --> 27:28.819 The implications of financial markets, which may sound like 27:28.817 --> 27:32.867 just sort of a dry academic course--this will also effect 27:32.869 --> 27:36.849 the outcome of presidential elections among other things 27:36.849 --> 27:41.189 because you'll see that from what the presidential candidates 27:41.191 --> 27:44.521 started talking about nine months ago, 27:44.519 --> 27:47.199 which was a lot of foreign policy, war in Iraq, 27:47.202 --> 27:50.412 which we'd be doing a better variety of those issues. 27:50.410 --> 27:54.900 You'll see that by the time this election occurs, 27:54.900 --> 28:00.230 that the focus will be much more and perhaps dominantly so 28:00.232 --> 28:04.292 on the economy, on people defaulting and being 28:04.294 --> 28:08.334 thrown out of their houses, on what's happening to the 28:08.330 --> 28:09.930 economy generally. 28:09.930 --> 28:16.920 It's going to hit other things, such as trade and the country 28:16.917 --> 28:21.077 being more populist, more protectionist, 28:21.076 --> 28:25.606 which also has negative implications because the United 28:25.612 --> 28:30.822 States right now is the largest debtor nation in the world. 28:30.819 --> 28:33.239 Ten years ago, we were the largest creditor, 28:33.238 --> 28:35.318 and when you're the largest debtor, 28:35.319 --> 28:38.169 that means you have to borrow money all the time from people 28:38.169 --> 28:39.279 in the outside world. 28:39.279 --> 28:44.389 If we become more protectionist and outsiders basically say, 28:44.385 --> 28:48.875 look these Americans are starting to not have an open 28:48.884 --> 28:51.744 world; I'm worried that maybe I won't 28:51.735 --> 28:55.835 be able to get my money back or they don't really want me to be 28:55.837 --> 28:59.127 part of their world, then there's the potential that 28:59.133 --> 29:02.623 they will invest less with us, which again will raise our cost 29:02.623 --> 29:04.743 of borrowing in financial markets, 29:04.740 --> 29:08.690 whether they're for Treasuries or other types of things, 29:08.692 --> 29:12.862 which will have the effect of again slowing our economy. 29:12.859 --> 29:17.639 You all are about to enter the world in a very, 29:17.641 --> 29:20.761 very, very interesting time. 29:20.759 --> 29:28.039 The problems with our financial institutions are perhaps the 29:28.044 --> 29:33.234 greatest that we've had since the 1930s, 29:33.230 --> 29:38.750 in the era of the Great Depression, which is when my dad 29:38.750 --> 29:44.170 was sort of a young man and he grew up in the 1930s. 29:44.170 --> 29:49.580 Anyone who did would tell you, that was just a disastrous 29:49.577 --> 29:54.697 economic time because those financial institutions--as 29:54.695 --> 29:59.615 opposed to struggling the way ours are and ours will 29:59.620 --> 30:05.120 ultimately be fine--those financial institutions collapsed 30:05.124 --> 30:10.444 because they didn't have the kind of safeguards that the 30:10.435 --> 30:15.355 system has basically put into our system, 30:15.360 --> 30:19.010 currently. We learned from the 1930s how 30:19.011 --> 30:24.581 to avoid a complete collapse of the financial institutions. 30:24.579 --> 30:30.479 This is a trying time for the system and the Federal Reserve 30:30.484 --> 30:36.594 is doing a really excellent job at sort of guaranteeing it. 30:36.589 --> 30:40.909 If you read about the recent Bear Stearns crisis, 30:40.910 --> 30:45.860 which was front page of literally every newspaper in the 30:45.859 --> 30:48.799 world, where the Federal Reserve 30:48.796 --> 30:53.196 stepped in and basically provided sufficient guarantees 30:53.195 --> 30:57.915 and credit support so that this one institution wouldn't go 30:57.919 --> 31:01.559 bankrupt. There were--it's a brokerage 31:01.563 --> 31:03.423 firm. Brokerage firms are not 31:03.421 --> 31:06.931 regulated by the Federal Reserve and they don't have access to 31:06.925 --> 31:10.195 the borrowings of the Federal Reserve to protect them, 31:10.200 --> 31:16.570 which is--they're sort of outside the system. 31:16.569 --> 31:20.599 The reason why the Federal Reserve went and did that is 31:20.598 --> 31:25.248 that the large brokerage firms, which don't have the same kind 31:25.252 --> 31:28.982 of regulation or the same kind of ultimate lender, 31:28.980 --> 31:34.700 literally have trillions and trillions of dollars of 31:34.697 --> 31:40.977 counter-party risk--sort of guarantees that they've given 31:40.976 --> 31:44.336 that they'll do something. 31:44.339 --> 31:47.489 If they go bankrupt, they can't do it and that 31:47.485 --> 31:51.815 leaves the system vulnerable to people expecting performance on 31:51.820 --> 31:55.670 things like credit default swaps and things that are too 31:55.665 --> 31:59.645 technical to actually explain to you at the moment. 31:59.650 --> 32:02.690 But, there are so many trillions of dollars of those 32:02.687 --> 32:06.077 obligations that if they get into trouble--this isn't just 32:06.082 --> 32:10.122 like a subprime mortgage; these are in the trillions. 32:10.119 --> 32:14.699 Just credit default swaps are about forty-five trillion 32:14.698 --> 32:19.278 dollars and the subprime mortgage losses will only be a 32:19.276 --> 32:21.986 few hundred billion dollars. 32:21.990 --> 32:26.970 The Fed was basically going in and saying, we can't take this 32:26.972 --> 32:29.382 risk to our overall system. 32:29.380 --> 32:33.140 That's one reason why the stock market has gotten better because 32:33.135 --> 32:36.405 the prospect of a collapse of the system has been really 32:36.414 --> 32:40.544 reduced. I wasn't trying to depress you 32:40.541 --> 32:42.931 on an early morning. 32:42.930 --> 32:47.640 The American system is enormously resilient and there 32:47.636 --> 32:52.886 will be solutions that happen over time that will deal with 32:52.885 --> 32:56.035 this. The impact of financial 32:56.035 --> 33:01.315 markets, which is your course--I'm just a visitor--is 33:01.316 --> 33:07.406 really driving the whole overall economy and is affecting the 33:07.409 --> 33:11.679 global economy. The countries in Asia--China, 33:11.680 --> 33:16.010 India, and in particular those large ones--will obviously 33:16.008 --> 33:20.878 sustain lower growth rates as a result of this financial markets 33:20.876 --> 33:23.886 problem here in the United States. 33:23.890 --> 33:26.570 You're seeing the U.K. 33:26.569 --> 33:31.229 having already slowed down and this will probably, 33:31.229 --> 33:36.079 as it has historically, roll into continental Europe 33:36.080 --> 33:40.740 and result in the whole world growing slower, 33:40.740 --> 33:46.010 higher unemployment and people being adversely affected. 33:46.009 --> 33:49.089 How financial markets work, how they're impacted, 33:49.088 --> 33:52.618 and what would have happened if these subprime mortgages 33:52.615 --> 33:56.525 wouldn't have been allowed to have been made from a regulatory 33:56.527 --> 34:00.787 point of view, and what would have happened if 34:00.791 --> 34:06.371 they were, instead of being rated AAA, they would have been 34:06.368 --> 34:09.678 rated single B. Hardly anybody would have 34:09.677 --> 34:13.647 bought them and that would have controlled the expansion and the 34:13.651 --> 34:15.671 risk to the financial system. 34:15.670 --> 34:19.200 Historians will look back on it and real people, 34:19.195 --> 34:23.905 not that historians aren't, but real practitioners will try 34:23.912 --> 34:29.162 and solve this problem by having different types of regulation so 34:29.162 --> 34:33.512 that you can't get into this kind of risk posture. 34:33.510 --> 34:37.390 In any case, why don't we take some 34:37.390 --> 34:41.250 questions. That's an opening and we can 34:41.248 --> 34:44.358 talk about anything you'd like to. 34:44.360 --> 34:50.050 34:50.050 --> 34:51.120 Dare to be great? 34:51.120 --> 34:54.920 Yes? Student: I'm sort of 34:54.922 --> 34:59.192 curious; maybe you can sort of take us 34:59.190 --> 35:06.140 through one that went great in your opinion and one that went 35:06.142 --> 35:08.232 very poorly. Mr. 35:08.226 --> 35:10.536 Stephen Schwarzman: The question was, 35:10.537 --> 35:13.597 can I take you through a good deal and a bad deal? 35:13.599 --> 35:18.989 I assume private equity or-- Student: Yes. 35:18.989 --> 35:19.929 Mr. Stephen Schwarzman: 35:19.934 --> 35:21.144 …to show you how this works. 35:21.139 --> 35:27.399 Well, a good deal--those are always more fun by the way--a 35:27.398 --> 35:31.568 good deal was really our first deal. 35:31.570 --> 35:34.420 It was a company called U.S. 35:34.420 --> 35:36.740 Steel Corporation, which is sort of a big one. 35:36.739 --> 35:41.479 It was attacked by a corporate raider named Carl Icahn, 35:41.476 --> 35:45.156 who I think you have some familiarity with, 35:45.159 --> 35:47.439 being a prior speaker. 35:47.440 --> 35:51.000 The corporation didn't want to be taken over, 35:50.995 --> 35:55.435 so they were trying to marshal cash to fight him off. 35:55.440 --> 35:59.170 The way they chose to fight him off was by buying their own 35:59.169 --> 36:02.579 stock at a higher price to give their shareholders the 36:02.577 --> 36:05.147 equivalent of a really big dividend, 36:05.150 --> 36:07.910 but doing it by buying their stock, which gave them capital 36:07.905 --> 36:10.505 gains treatment; so, they needed to get a bunch 36:10.507 --> 36:12.657 of money. The way they thought about 36:12.662 --> 36:16.052 getting some money was to sell one of their big assets; 36:16.050 --> 36:24.270 the asset they chose to sell was their railroads and barge 36:24.274 --> 36:30.194 lines and ore boats on the Great Lakes. 36:30.190 --> 36:34.610 To make steel, for those of you who have never 36:34.605 --> 36:38.035 done it, it's a lot like cooking. 36:38.039 --> 36:42.279 You need a variety of different ingredients and the ingredients, 36:42.279 --> 36:46.179 instead of just being carried into your house in a shopping 36:46.181 --> 36:48.391 bag, come in on a railroad because 36:48.393 --> 36:51.113 they're iron ore, and coke, and all these really 36:51.106 --> 36:55.466 heavy things. I guess around 1880-1890 a 36:55.472 --> 37:01.432 fellow named Andrew Carnegie, who owned U.S. 37:01.429 --> 37:04.289 Steel--it was then called Carnegie Steel--built all these 37:04.291 --> 37:06.081 railroads to bring this stuff in. 37:06.079 --> 37:08.759 U.S. Steel wanted to sell it and 37:08.760 --> 37:14.210 they didn't want to lose control of it because they felt if that 37:14.207 --> 37:18.527 was a lifeline artery into their steel plants, 37:18.530 --> 37:22.140 where it brought in 100% of the raw materials to make steel and 37:22.143 --> 37:25.523 took out about 85-90% of the finished product because steel 37:25.524 --> 37:28.734 is really heavy. So, you just can't carry it out 37:28.731 --> 37:31.761 and put it on a truck, necessarily--goes out by 37:31.760 --> 37:35.450 railroad also. Because this was an artery that 37:35.451 --> 37:40.261 went right into the company, if we started overcharging for 37:40.262 --> 37:43.412 the railroad, they were worried that we would 37:43.409 --> 37:47.049 bankrupt the steel companies, we'd siphon off all the profit. 37:47.050 --> 37:50.940 We did a partnership deal where we owned 51% of the railroads, 37:50.943 --> 37:55.113 in effect; they owned 49% and we--let me 37:55.110 --> 37:59.800 show you how excessive finance can get. 37:59.800 --> 38:05.630 I believe the deal was somewhere around 600 million 38:05.629 --> 38:12.619 dollars--700 million dollars in 1988-89, so that's a lot more 38:12.624 --> 38:21.264 money today. We borrowed almost all the 38:21.257 --> 38:26.117 money; I think we put up fifteen or 38:26.120 --> 38:31.550 twenty million dollars, so the leverage was huge. 38:31.550 --> 38:34.790 The business wasn't particularly a growth business; 38:34.790 --> 38:36.050 it was pretty stable. 38:36.050 --> 38:39.250 We bought it in the middle of strike, so part of the art of 38:39.254 --> 38:41.414 what we did was guessing whether U.S. 38:41.409 --> 38:44.499 Steel would come back to the same production level that they 38:44.497 --> 38:48.457 were before. Our guess/analysis was correct 38:48.464 --> 38:55.264 and every year the profits from that company would be worth more 38:55.258 --> 39:01.618 than the amount of money that we invested in the equity. 39:01.619 --> 39:07.239 So, we ended up making twenty-four times our money in 39:07.235 --> 39:10.255 that deal in twelve years. 39:10.260 --> 39:12.910 In our world, not the academic world, 39:12.911 --> 39:17.041 if you make twenty-four times your money in twelve years, 39:17.035 --> 39:25.855 this is regarded as a success; so, that was a good one. 39:25.860 --> 39:34.690 Now, a bad one shows you a little bit about the volatility 39:34.688 --> 39:40.418 and danger of the currency markets. 39:40.420 --> 39:47.880 We, in 1998, bought--it might have been 1997 39:47.884 --> 39:58.304 or 1998--controlled the second biggest cellular phone company 39:58.299 --> 40:03.239 in Argentina, which was an interesting place 40:03.236 --> 40:05.756 to be. I'm sure you all have one of 40:05.760 --> 40:09.730 these if you don't have something more elegant and some 40:09.732 --> 40:14.072 other sort of personal device like one of these that can get 40:14.073 --> 40:17.093 email or it can--you can talk on it. 40:17.090 --> 40:21.710 You can almost set it up as a disco; 40:21.710 --> 40:23.670 you can do almost anything with it. 40:23.670 --> 40:27.730 We bought this company for eight times cash flow, 40:27.729 --> 40:32.379 which is not real high for a company that's growing very 40:32.380 --> 40:37.370 rapidly in what was called an emerging markets country. 40:37.369 --> 40:42.639 This particular country had its currency indexed to the dollar, 40:42.644 --> 40:47.754 so it was almost like investing in the United States because, 40:47.748 --> 40:49.788 what could go wrong? 40:49.789 --> 40:53.999 A rapidly growing country invested in dollars. 40:54.000 --> 40:58.410 We borrowed dollars to buy this company because in Argentina you 40:58.409 --> 41:01.209 couldn't borrow money for a long time. 41:01.210 --> 41:04.480 One of the great things about the United States' financial 41:04.478 --> 41:08.088 markets is that you can borrow debt for long periods of time. 41:08.090 --> 41:11.400 This looked to be a very low-risk, rapidly growing 41:11.403 --> 41:15.533 situation, where we were hopeful we were going to make four to 41:15.529 --> 41:17.219 five times our money. 41:17.219 --> 41:22.539 There was only one problem that--Argentina the country 41:22.536 --> 41:30.136 collapsed. I mean, literally collapsed. 41:30.139 --> 41:33.049 The linkage, which is called a peg to the 41:33.053 --> 41:37.133 dollar, turned out to be a most unfortunate thing and the 41:37.133 --> 41:41.363 emerging markets--this is when you started with the Russian 41:41.358 --> 41:44.198 financial crisis and this crisis. 41:44.199 --> 41:46.199 Then you had an Asian financial crisis; 41:46.199 --> 41:50.839 it rolled through the whole world with currencies rapidly 41:50.842 --> 41:55.402 changing their values--all kinds of countries at risk of 41:55.402 --> 41:59.752 collapse. It got to Argentina and the 41:59.745 --> 42:03.965 whole economy pulverized; it was like a depression. 42:03.969 --> 42:09.519 They got off their linkage to the dollar; 42:09.519 --> 42:13.169 their currency became close to worth nothing; 42:13.170 --> 42:16.940 and then we had to pay debt back in dollars with earnings in 42:16.941 --> 42:19.371 Argentina, which were worth nothing. 42:19.369 --> 42:24.219 We lost every cent--every dollar we invested in that 42:24.216 --> 42:28.586 investment--and even as we were going bankrupt, 42:28.588 --> 42:31.628 it was still a good company. 42:31.630 --> 42:39.200 In finance, bad things can happen to nice people and even 42:39.196 --> 42:47.026 when you think things through, you can have some really bad 42:47.033 --> 42:50.753 outcomes. We've had--obviously, 42:50.754 --> 42:55.244 if you have very high returns, you have wonderful 42:55.244 --> 43:00.674 stories--many more wonderful stories than the bad ones. 43:00.670 --> 43:06.840 We bought a chemical company called Celanese in about 2003, 43:06.836 --> 43:11.086 right after the recession was lifting. 43:11.090 --> 43:15.370 It was a company in Germany, but it had only 10% of its 43:15.368 --> 43:17.268 activities in Germany. 43:17.269 --> 43:20.299 It had about 60% of them in the United States, 43:20.297 --> 43:21.977 so it was really a U.S. 43:21.980 --> 43:25.180 company masquerading as a German company. 43:25.179 --> 43:30.459 The price-earnings multiples of German chemical companies were 43:30.458 --> 43:34.068 very low. The price-earnings of American 43:34.073 --> 43:36.563 companies were much higher. 43:36.559 --> 43:42.529 Not being entirely dim-witted, what we did was we changed the 43:42.525 --> 43:48.185 location of the company--the headquarters--from Germany to 43:48.192 --> 43:50.382 the United States. 43:50.380 --> 43:54.340 They also, for some reason that we didn't completely understand, 43:54.344 --> 43:57.494 had three headquarters operations going--two in the 43:57.490 --> 43:59.630 United States, one in Germany. 43:59.630 --> 44:05.590 We closed two of those three; we invested a lot more money in 44:05.594 --> 44:09.524 expansion as we were coming out of a recession; 44:09.519 --> 44:12.319 we leveraged the company pretty highly; 44:12.320 --> 44:14.780 and we made, I guess it was, 44:14.781 --> 44:19.701 about six times our money in two years owning Celanese, 44:19.704 --> 44:24.084 which is on the New York Stock Exchange now. 44:24.079 --> 44:27.069 It's a lovely company, wonderful company. 44:27.070 --> 44:32.920 There are many stories of that type, where we invest more 44:32.921 --> 44:37.941 money, move things around, borrow a lot of money, 44:37.936 --> 44:42.426 catch fundamentals as they're going up. 44:42.429 --> 44:47.419 The good stories are really a lot of fun; 44:47.420 --> 44:54.040 we enjoy those and so do our investors. 44:54.039 --> 44:59.029 Those are--I gave you two winners and one loser instead 44:59.034 --> 45:04.204 one and one because, in our real estate business, 45:04.204 --> 45:09.134 we've probably, just to give you perspective, 45:09.130 --> 45:15.850 we've only lost money on two situations in our history out of 45:15.847 --> 45:18.867 about 160 investments. 45:18.869 --> 45:22.239 The number of good stories to bad stories--I mean, 45:22.240 --> 45:26.300 this isn't like Las Vegas where you end up as a net loser or 45:26.298 --> 45:27.878 it's a lot of luck. 45:27.880 --> 45:34.070 Every time you do one of these things, you have a team of 45:34.067 --> 45:39.807 people working on it, some of whom are in their early 45:39.813 --> 45:43.573 40s, who are usually partners. 45:43.570 --> 45:47.530 Then, each one of the firms scales down in some kind of 45:47.526 --> 45:50.966 hierarchy, where you have managing directors, 45:50.969 --> 45:53.219 and vice presidents, and associates, 45:53.217 --> 45:56.957 and analysts. The folks like yourself tend to 45:56.955 --> 46:02.235 get hired at firms like ours as analysts, which means you do 46:02.239 --> 46:04.029 statistical work. 46:04.030 --> 46:08.200 I guess they're called now models on a computer, 46:08.201 --> 46:13.441 which give us an idea that if any of the variables affecting 46:13.438 --> 46:17.498 these deals change, how will it affect the overall 46:17.497 --> 46:21.127 earnings of the company, or cash flow of the company, 46:21.130 --> 46:24.490 or our ability to service the debt of that company. 46:24.489 --> 46:27.829 Then we can figure out, from doing that, 46:27.830 --> 46:31.770 what price we'd want to pay for the company, 46:31.769 --> 46:35.269 how much debt we could safely put on it so that the business 46:35.274 --> 46:36.764 doesn't get in trouble. 46:36.760 --> 46:42.210 Now, this analyst program that firms like ours have and people 46:42.208 --> 46:47.478 all over Wall Street have is like a huge industry for people 46:47.478 --> 46:52.288 your age. This didn't exist when I was in 46:52.291 --> 46:58.771 college and I'm actually not that old compared to you. 46:58.769 --> 47:03.569 I sort of think I'm almost the same age, a little older, 47:03.566 --> 47:07.836 but it's amazing having people like yourselves. 47:07.840 --> 47:12.100 I mean, in two years you could be in my conference room with 47:12.098 --> 47:16.718 all the rest of the team talking about a live deal and putting in 47:16.718 --> 47:20.978 your two cents--a perception whether you think something's a 47:20.977 --> 47:22.707 little more risky. 47:22.710 --> 47:24.650 What we do at our firm, whenever we're considering 47:24.652 --> 47:27.072 something, we always go around the table and ask everybody. 47:27.070 --> 47:30.120 So, we're not trying to intimidate anybody, 47:30.117 --> 47:34.327 but we figure that if somebody your age has been working on 47:34.325 --> 47:37.875 something and knows the numbers sort of cold, 47:37.880 --> 47:39.140 you'll have some views. 47:39.139 --> 47:41.549 It's always fun, particularly for me, 47:41.553 --> 47:45.713 to ask because that's how you start the process of learning. 47:45.710 --> 47:49.090 Finance is a business that is an apprentice business. 47:49.090 --> 47:53.940 It's sort of like going back to the Middle Ages where they had 47:53.938 --> 47:58.388 guilds and you'd learn your business by apprenticing with 47:58.390 --> 48:01.570 somebody else who's already done it. 48:01.570 --> 48:05.220 There's a base level of knowledge that you have to have 48:05.223 --> 48:07.933 in finance before you can be creative. 48:07.929 --> 48:12.199 The only way you get that is by working with other people who've 48:12.198 --> 48:14.568 already done it and are doing it. 48:14.570 --> 48:19.450 People take enormous care when working with folks like yourself 48:19.452 --> 48:24.022 in terms of making sure you get the right answer or not. 48:24.019 --> 48:26.939 What I'd say, which is different in the real 48:26.944 --> 48:30.484 world--as a visitor from the real world to you in the 48:30.481 --> 48:33.951 academic world--one of the real differences is, 48:33.949 --> 48:38.129 in the real world there is only one grade for every project, 48:38.128 --> 48:40.818 which is the equivalent of a course, 48:40.820 --> 48:44.750 and that is an A grade. 48:44.750 --> 48:48.290 The definition of an A isn't the same as in academics. 48:48.289 --> 48:50.639 In academics, you can get an A--and I don't 48:50.640 --> 48:53.940 know what Yale's current grading curve is now--you can get A 48:53.942 --> 48:56.652 sometimes with a ninety, you can get an A with a 48:56.653 --> 48:59.043 ninety-two, you can get an A with ninety-three; 48:59.039 --> 49:01.689 that's sort of pretty good--that's an A. 49:01.690 --> 49:04.300 In our world, an A is a hundred. 49:04.300 --> 49:10.840 This was shocking to me because I wasn't a one hundred kind of 49:10.844 --> 49:14.444 person. My first project that I 49:14.440 --> 49:21.760 did--just to give you an idea of the real need for excellence and 49:21.760 --> 49:28.280 perfection in what we do--is I was assigned a project. 49:28.280 --> 49:31.860 I worked on it really hard; I wrote something up that was 49:31.858 --> 49:34.638 like a term paper, which normally you only get to 49:34.636 --> 49:36.586 do one a year. In the real world, 49:36.588 --> 49:39.008 you get to do them every two to three weeks. 49:39.010 --> 49:43.430 I submitted this thing to a gentleman named Herman Kahn, 49:43.425 --> 49:47.915 who was a partner at Lehman Brothers--an older partner at 49:47.920 --> 49:50.570 the time when I was doing it. 49:50.570 --> 49:55.980 I sent it down to him and he was waiting for this project and 49:55.981 --> 50:00.041 I got a phone call about three hours later. 50:00.039 --> 50:06.339 It sort of went like this: "This is Herman Kahn calling, 50:06.341 --> 50:09.551 is this Steve Schwarzman?" 50:09.550 --> 50:11.670 I said, "Yes it is, Mr. Kahn." 50:11.670 --> 50:17.640 He said, "I got your paper; there's a typo on page 50:17.643 --> 50:20.963 forty-three." Bang. 50:20.960 --> 50:24.980 That is the only thing I ever heard from Herman Kahn. 50:24.980 --> 50:33.140 A slammed phone because a comma was in the wrong place on this 50:33.144 --> 50:38.904 piece of work and I had really struggled. 50:38.900 --> 50:44.600 That's all I got--an angry man and a slammed phone and I 50:44.602 --> 50:49.162 basically said, what kind of crazy world am I 50:49.164 --> 50:52.384 in? What is this about? 50:52.380 --> 50:57.620 What I learned is that any piece of work that you did that 50:57.622 --> 51:02.502 wasn't completely correct, you got a version of Herman 51:02.496 --> 51:04.516 Kahn in your face. 51:04.519 --> 51:07.669 Different people did it different ways, 51:07.666 --> 51:12.216 but this was a radically different world--the real world 51:12.221 --> 51:15.121 in finance--than I was used to. 51:15.119 --> 51:18.689 I was a major here in something that doesn't exist, 51:18.693 --> 51:22.983 I'm sure, anymore--a creature of the 1960s called Culture and 51:22.980 --> 51:26.270 Behavior. What we did is we had an 51:26.267 --> 51:31.567 interdisciplinary major with--in psychology, sociology, 51:31.571 --> 51:34.421 biology, and anthropology. 51:34.420 --> 51:37.590 In other words, we studied how people thought 51:37.586 --> 51:39.886 and why they thought that way. 51:39.889 --> 51:42.679 I thought that was a pretty neat thing to be doing. 51:42.679 --> 51:46.139 We had professors from each of those disciplines; 51:46.140 --> 51:51.130 we had two seminars a week; we had eight students in the 51:51.131 --> 51:55.141 major and we had four professors working with us all the time. 51:55.139 --> 52:00.479 So, I was used to a little softer, more loveable world than 52:00.479 --> 52:03.279 finance. So, finance for me was 52:03.281 --> 52:08.581 shocking--that people would have to have everything correct all 52:08.583 --> 52:11.203 the time. At your level, 52:11.199 --> 52:16.539 what you'll be doing--that's sort of what it is, 52:16.537 --> 52:19.487 there's no alternative. 52:19.489 --> 52:22.799 People are nice, they'll help you get there, 52:22.796 --> 52:26.096 but there's no, absolutely no flexibility in 52:26.102 --> 52:28.872 terms of getting perfect scores. 52:28.869 --> 52:33.059 Now, once you do that--I'm giving you a little career 52:33.057 --> 52:37.727 advice here--you do that for about two years or three years 52:37.729 --> 52:42.239 and then after that you can start being more creative and 52:42.239 --> 52:45.379 finance can be a really creative, 52:45.380 --> 52:48.650 interesting, problem-solving business, 52:48.654 --> 52:51.314 where it's global--it's fun. 52:51.309 --> 52:55.949 I mean, in my last two weeks, where have I been? 52:55.949 --> 53:00.409 Let's see, certainly in New Haven now; 53:00.409 --> 53:08.719 I was in Bahrain, Kuwait, Saudi Arabia, 53:08.717 --> 53:15.927 Abu Dhabi, Dubai, Cambodia, Korea, 53:15.932 --> 53:21.182 Ireland and Germany. 53:21.179 --> 53:26.239 It's actually really interesting and you meet people 53:26.237 --> 53:31.127 all over the world; you get to see how they think 53:31.127 --> 53:35.967 about issues--how their financial systems and their 53:35.967 --> 53:39.407 economies work. During that trip, 53:39.412 --> 53:43.722 I met heads of countries, heads of financial 53:43.717 --> 53:47.507 institutions. You're trying to figure out 53:47.511 --> 53:52.301 really the most complex stuff in the world, which is how all 53:52.299 --> 53:55.869 these systems work and how they interact. 53:55.869 --> 54:03.829 Ultimately, what you will do in an individual situation is based 54:03.826 --> 54:10.896 upon this immense flow of knowledge and data and cultural 54:10.899 --> 54:15.299 differences. I missed China and India on 54:15.300 --> 54:19.620 this trip, but we get them on other trips and it's 54:19.620 --> 54:23.850 really--finance done appropriately is a wonderful 54:23.852 --> 54:27.952 lifetime learning, ever changing, 54:27.952 --> 54:31.952 exciting kind of business. 54:31.949 --> 54:36.039 It's not like, sort of, selling socks to a 54:36.036 --> 54:40.646 department store; this is a really fascinating 54:40.650 --> 54:44.050 business--it never stays the same. 54:44.050 --> 54:47.300 You have so many different people in so many different 54:47.297 --> 54:50.477 countries making so many different kinds of decisions 54:50.483 --> 54:53.233 that you, as one decision maker in that 54:53.225 --> 54:56.705 enormously complicated matrix--the chance that you're 54:56.712 --> 55:00.802 going to get it right is only because you're absorbing as much 55:00.804 --> 55:04.764 information as you can from every place and trying to thread 55:04.761 --> 55:07.781 the needle to make a correct decision. 55:07.780 --> 55:11.700 It's a lot of fun, so any of you who go from this 55:11.695 --> 55:14.545 course into being a practitioner, 55:14.550 --> 55:18.830 which is sort of what I am in the real world--it happens to 55:18.829 --> 55:22.739 have historically been quite financially rewarding, 55:22.739 --> 55:28.349 which I guess is like a--I used to think that was a really good 55:28.349 --> 55:30.429 thing, until the U.S. 55:30.429 --> 55:33.189 is reevaluating exactly what it thinks about success. 55:33.190 --> 55:38.960 But, it's basically a good thing and it's fascinating and I 55:38.956 --> 55:45.416 would encourage you if you have an interest in it to pursue it. 55:45.420 --> 55:47.560 Yes? Student: [Inaudible] 55:47.556 --> 55:48.846 Mr. Stephen Schwarzman: Can you 55:48.853 --> 55:49.593 speak up a little? 55:49.590 --> 55:55.520 Student: [Inaudible] profitable and my second 55:55.519 --> 56:02.729 question for you is from where and what kinds of classes do you 56:02.729 --> 56:07.379 see the next return for [inaudible]? 56:07.380 --> 56:09.770 Mr. Stephen Schwarzman: Okay, 56:09.771 --> 56:14.011 it was a question about carried interest being taxed at a lower 56:14.008 --> 56:18.108 rate and the next question is what asset class do we think is 56:18.108 --> 56:21.588 going to have really high returns over the next five 56:21.593 --> 56:24.993 years. On the carried interest 56:24.989 --> 56:30.609 question, this is something that has been pretty well, 56:30.612 --> 56:32.842 sort of, surfaced. 56:32.840 --> 56:39.450 There are a bunch of arguments from different sides of the 56:39.454 --> 56:42.824 political spectrum on this. 56:42.820 --> 56:47.880 Folks like ourselves, who have had carried interest 56:47.881 --> 56:52.641 taxed at capital gains rates since the 1930s, 56:52.639 --> 56:58.049 are sort of wondering where the whole discussion is coming from. 56:58.050 --> 57:01.670 In other words, this has been going on for 57:01.669 --> 57:05.909 longer than I've been alive--that this has been a 57:05.906 --> 57:08.816 capital gains treatment item. 57:08.820 --> 57:15.190 The way carried interest works is, we get a 20% share of the 57:15.187 --> 57:21.117 profits of any investment over some type of hurdle rate, 57:21.122 --> 57:24.362 which is a minimum return. 57:24.360 --> 57:27.490 In our case, usually it's around 8%. 57:27.489 --> 57:35.039 To get this carried interest, we have to invest significant 57:35.043 --> 57:41.563 monies in our funds, which is totally unlike normal 57:41.555 --> 57:45.635 compensation. Most people--to get--some 57:45.643 --> 57:50.073 people in the government want to characterize this as normal 57:50.066 --> 57:52.536 compensation, ordinary income; 57:52.539 --> 57:56.029 people who get ordinary income just work and they get it. 57:56.030 --> 57:59.030 They normally don't invest millions of dollars for the 57:59.027 --> 58:00.947 opportunity to get their salary. 58:00.949 --> 58:06.359 We also have to--if we don't make a certain minimum return 58:06.359 --> 58:11.009 and we've gotten some of this carried interest, 58:11.010 --> 58:14.660 by the time a whole fund's over, we have to pay the carried 58:14.662 --> 58:17.982 interest back. Most people who earn ordinary 58:17.980 --> 58:22.760 income don't pay back their income after they've gotten it. 58:22.760 --> 58:28.260 58:28.260 --> 58:31.210 Carried interest basically comes out of splitting the 58:31.213 --> 58:37.943 profits from a partnership, where it's sort of quite normal 58:37.938 --> 58:46.778 for a working partner to get more of a deal than just a 58:46.783 --> 58:50.063 passive investor. 58:50.059 --> 58:54.449 Whether it's somebody just in a family--somebody who works in 58:54.448 --> 58:58.908 the business and somebody else in the family puts up the money 58:58.909 --> 59:01.249 to buy part of the business. 59:01.250 --> 59:04.740 Usually, the person working in the business gets more. 59:04.739 --> 59:10.739 So, we sort of look at this as sort of an issue that's now in 59:10.739 --> 59:16.539 the political world and it will be solved in that world. 59:16.539 --> 59:25.099 We don't have much of a say in that, but I would say that the, 59:25.101 --> 59:33.381 sort of, characterization of this is being something as sort 59:33.382 --> 59:38.852 of an odd thing. It's really been going on for 59:38.845 --> 59:42.505 eighty years, so I don't quite understand 59:42.508 --> 59:48.098 exactly why it's officially odd now and it hasn't been for all 59:48.095 --> 59:50.105 that time period. 59:50.110 --> 59:55.130 The second part of that question is--I'll ask it a 59:55.128 --> 1:00:00.338 different way than it was asked, which is, what's going to be 1:00:00.338 --> 1:00:03.918 the best performing asset class over the next five years? 1:00:03.920 --> 1:00:08.360 I think that was more or less what you were asking. 1:00:08.360 --> 1:00:13.090 It's always hard to tell exactly what that will be, 1:00:13.087 --> 1:00:18.847 but typically you have to have a view of the world and I think 1:00:18.854 --> 1:00:24.434 our view of the world is that the economies of the developed 1:00:24.433 --> 1:00:30.393 countries are going to get hurt over the next year or so. 1:00:30.389 --> 1:00:36.909 It ought to drive down asset values of a variety of types and 1:00:36.912 --> 1:00:42.132 there should be a great opportunity out about, 1:00:42.130 --> 1:00:47.240 sort of, a year to start buying companies and other types of 1:00:47.235 --> 1:00:51.125 assets at what should prove to be a bottom. 1:00:51.130 --> 1:00:56.270 Then, if you can leverage those assets, as the economy keeps 1:00:56.268 --> 1:00:59.658 getting better, you'll make really great 1:00:59.664 --> 1:01:03.494 returns. The last time this set of 1:01:03.493 --> 1:01:08.283 circumstances presented themselves was 2002, 1:01:08.279 --> 1:01:14.179 after the recession in 2001, which went into 2002. 1:01:14.179 --> 1:01:21.409 We were the biggest purchaser of companies in the world in 1:01:21.412 --> 1:01:25.662 2003 and 2004 and, as a result of that, 1:01:25.656 --> 1:01:30.776 the fund that we used to buy those companies earned about 51% 1:01:30.775 --> 1:01:35.065 after fees, which for those who keep score 1:01:35.071 --> 1:01:39.931 of these things is really quite extraordinary. 1:01:39.929 --> 1:01:45.169 We think that kind of cycle is going to repeat itself. 1:01:45.170 --> 1:01:50.190 We would think that the private equity business--you're seeing 1:01:50.191 --> 1:01:54.971 now, we've just involved with a deal that Professor Shiller 1:01:54.966 --> 1:01:58.996 mentioned--it was in the newspaper this week, 1:01:59.000 --> 1:02:06.510 I guess--where we were buying assets from Citibank--loans at 1:02:06.512 --> 1:02:11.192 discounts. There will be opportunities in 1:02:11.187 --> 1:02:17.897 the debt area over the next year or so that also ought to be very 1:02:17.900 --> 1:02:21.010 good. Yes? 1:02:21.010 --> 1:02:24.240 Student: How do you feel about and how do you deal with 1:02:24.239 --> 1:02:27.309 failures in investments, like your Argentina investment? 1:02:27.309 --> 1:02:31.989 And how do you think that in the future? 1:02:31.989 --> 1:02:34.149 Mr. Stephen Schwarzman: The 1:02:34.147 --> 1:02:38.067 question is, how do we deal with failure like our Argentinean 1:02:38.069 --> 1:02:42.789 investment? The second part of that was? 1:02:42.789 --> 1:02:44.789 Student: How do you think the private equity will 1:02:44.792 --> 1:02:45.632 evolve in the future? 1:02:45.630 --> 1:02:46.620 Mr. Stephen Schwarzman: How do 1:02:46.619 --> 1:02:48.049 we think private equity will evolve in the future? 1:02:48.050 --> 1:02:50.710 How do we deal with failure? 1:02:50.710 --> 1:02:52.300 I really hate failure. 1:02:52.300 --> 1:03:01.080 I mean it's deep, it's visceral; I really can't stand it. 1:03:01.079 --> 1:03:08.429 Because I feel so passionately about that, the people who work 1:03:08.432 --> 1:03:14.822 at our firm, all of whom I've been involved hiring, 1:03:14.820 --> 1:03:19.420 understand how I feel about failure and so we don't have a 1:03:19.418 --> 1:03:23.208 lot of people around who like failing either. 1:03:23.210 --> 1:03:26.310 One, because they don't want to disappoint me, 1:03:26.305 --> 1:03:30.635 but two, because I don't hire people who don't feel the same; 1:03:30.639 --> 1:03:33.949 this is like a passion not to fail. 1:03:33.949 --> 1:03:41.189 When we fail it's a major, major, major event. 1:03:41.190 --> 1:03:44.540 This is not a normal thing. 1:03:44.539 --> 1:03:49.829 What we do when we fail is we spend enormous time thinking 1:03:49.830 --> 1:03:55.310 through, what did we do wrong; what should we have seen; 1:03:55.310 --> 1:04:02.450 are our processes good; did we misidentify a variable 1:04:02.453 --> 1:04:10.323 that got us or did we identify it and didn't evaluate how bad 1:04:10.321 --> 1:04:14.781 that can be--we got that wrong. 1:04:14.780 --> 1:04:17.410 Or did we just simply have bad luck where there are three or 1:04:17.407 --> 1:04:19.987 four bad things that could happen and they all happened, 1:04:19.989 --> 1:04:24.539 like in a very rapid period of time? 1:04:24.539 --> 1:04:28.989 Failure is a--how you manage failure is very important and 1:04:28.991 --> 1:04:33.991 some people manage failure by making pretend it didn't happen. 1:04:33.989 --> 1:04:36.769 They just go about their jobs and people don't pay 1:04:36.766 --> 1:04:39.256 attention--well we lost money on that one. 1:04:39.260 --> 1:04:40.630 I don't believe in that. 1:04:40.630 --> 1:04:44.820 I like to learn. Sometimes, you learn more from 1:04:44.820 --> 1:04:47.970 your failures than you do from your successes. 1:04:47.969 --> 1:04:51.789 We actually changed the way we made decisions at the whole firm 1:04:51.794 --> 1:04:55.684 after a very early failure that we had had and changed our whole 1:04:55.681 --> 1:04:59.971 investment process; that one failure created most 1:04:59.969 --> 1:05:01.749 of our successes. 1:05:01.750 --> 1:05:06.950 Failure--when you make a lot of decisions--I used to think we 1:05:06.945 --> 1:05:09.105 could make no mistakes. 1:05:09.110 --> 1:05:16.890 That's what I always try and do, but if you're very active in 1:05:16.892 --> 1:05:24.292 making decisions--I think about this stuff so much that we 1:05:24.286 --> 1:05:31.806 probably get about 90 to 93% of our decisions correct, 1:05:31.810 --> 1:05:37.780 maybe a tiny bit higher; but, that means we've failed a 1:05:37.779 --> 1:05:40.009 lot, so there's 7% failure. 1:05:40.010 --> 1:05:45.300 Sometimes we get 95% right, but we're still making 5% 1:05:45.296 --> 1:05:47.936 failure across the firm. 1:05:47.940 --> 1:05:55.520 So, we're always struggling to improve and get that down to 1:05:55.518 --> 1:06:00.118 almost nothing. So, failure is a really 1:06:00.116 --> 1:06:03.316 important element in learning. 1:06:03.320 --> 1:06:05.390 It's like bad dating. 1:06:05.389 --> 1:06:07.229 You date somebody, it doesn't work out; 1:06:07.230 --> 1:06:11.250 that's the way, by the way, most dating is--it 1:06:11.251 --> 1:06:12.951 doesn't work out. 1:06:12.949 --> 1:06:15.049 Works out for a while, then it doesn't work out. 1:06:15.050 --> 1:06:20.030 So, all of you would probably think about, what did I learn 1:06:20.029 --> 1:06:22.529 from this? Why did I get involved with 1:06:22.531 --> 1:06:24.871 this person? Was this a good thing on 1:06:24.870 --> 1:06:26.840 balance or not a good thing? 1:06:26.840 --> 1:06:31.240 Am I going to repeat this mistake in the future? 1:06:31.240 --> 1:06:32.450 What did I learn? 1:06:32.449 --> 1:06:36.789 That's what we all do in our own lives and we do it in our 1:06:36.790 --> 1:06:38.770 commercial life as well. 1:06:38.769 --> 1:06:42.259 Second part of that question was the evolution on private 1:06:42.259 --> 1:06:45.109 equity. Private equity is an enduring 1:06:45.110 --> 1:06:49.930 asset class because it basically makes really great returns. 1:06:49.929 --> 1:06:53.029 It attracts very talented people. 1:06:53.030 --> 1:06:56.200 It reallocates capital around the globe. 1:06:56.199 --> 1:07:01.409 It goes where there's opportunity and it improves 1:07:01.412 --> 1:07:07.712 companies by investing more capital in these businesses. 1:07:07.710 --> 1:07:14.080 So, there's an enduring place for private equity. 1:07:14.079 --> 1:07:16.809 Right now, there's a capital crunch and there's not much 1:07:16.809 --> 1:07:19.389 money available to borrow except on smaller deals. 1:07:19.389 --> 1:07:23.539 That circumstance happened briefly in 2002, 1:07:23.537 --> 1:07:27.487 it happened in 1990-91, happened in 1987, 1:07:27.488 --> 1:07:31.338 happened in 1982, happened in 1975; 1:07:31.340 --> 1:07:34.580 so, it happens. When it happens, 1:07:34.581 --> 1:07:38.561 everybody always says, oh my goodness this business is 1:07:38.562 --> 1:07:41.982 going away and so forth; that never ends up occurring 1:07:41.976 --> 1:07:43.706 because capital always comes back. 1:07:43.710 --> 1:07:48.650 The evolution of the business will have a few super-bracket 1:07:48.652 --> 1:07:51.382 kind of firms, like ourselves, 1:07:51.380 --> 1:07:53.960 who keep attracting more and more capital, 1:07:53.956 --> 1:07:57.406 who are investing globally, who have people all over the 1:07:57.411 --> 1:08:00.971 world. The future for these kinds of 1:08:00.973 --> 1:08:05.933 businesses, I think, is pretty good--quite good. 1:08:05.929 --> 1:08:12.719 You have smaller firms that are in individual countries, 1:08:12.718 --> 1:08:18.888 sometimes segmented by an area of concentration. 1:08:18.890 --> 1:08:23.360 You'll have a healthcare group and some of those businesses 1:08:23.363 --> 1:08:25.933 will do well; some will wither. 1:08:25.930 --> 1:08:29.550 You have smaller firms that do smaller kinds of deals; 1:08:29.550 --> 1:08:32.370 there's always a place for that. 1:08:32.369 --> 1:08:38.029 So, I think that private equity tends to grow in step functions, 1:08:38.025 --> 1:08:43.585 as a function of how much money institutions have to put in the 1:08:43.592 --> 1:08:46.492 class. When stock markets go down and 1:08:46.489 --> 1:08:50.549 institutions generally have less money, they put less money in 1:08:50.553 --> 1:08:53.033 the class. When the markets get better, 1:08:53.029 --> 1:08:55.899 they put more money, so it's not a straight line of 1:08:55.904 --> 1:08:58.154 growth; it's a little wavy like that 1:08:58.145 --> 1:09:00.045 and I think that will continue. 1:09:00.050 --> 1:09:07.000 I think we're done.