WEBVTT

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PROFESSOR ROBERT SHILLER:
All right.

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Well, we're talking about
institutional investors today.

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I don't know, if that sounds
like an enticing topic to you.

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''Institutional'' sounds boring,
but I'm actually

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talking about people, who
control much of the wealth of

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the world, and they have a lot
of influence and importance.

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So, I think it's worth
considering them, and

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considering it's really
part of the

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governance of the world.

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How do things happen?

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Who decides what is
going to happen?

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What's going to be done?

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Increasingly, it
is professional

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institutional investors.

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They're kind of unseen,
mostly.

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They don't make movies about
them, not that I've ever seen.

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Someone tell me, if
there is one.

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But they're very important.

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So, I thought I would start
by just talking about the

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importance of --

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in this lecture I'm going to
include both people, who

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manage money for institutional
portfolios, and also financial

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advisors and financial
planners.

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They're a very big and
important part

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of the world economy.

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But I wanted to start by just
giving some perspective on

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them, by looking at what
it is that we own,

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and what they manage.

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So, I thought I would start
for the United States, and

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show a list of everything,
everything that's owned.

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And I got this from --

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this is from Table B-100 of
the Balance Sheet for the

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American Economy [addition: as
of the fourth quarter of

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2010], produced by the Federal
Reserve Board in Washington.

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So, it's really a sum of
everything, everything that

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people own in the
United States.

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And the point I'm going to
make from this is, that

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institutional investors are
quite prominent on this list,

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as managers of it.

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But let's just first
look at the total.

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This is $70,740 billion, or
let's say, $70 trillion is it.

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It's everything that anyone owns
in terms of assets that

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the Fed can measure.

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Of course, there's all
these priceless

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things that we all own.

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They are not on this list.

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So, what are they?

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Well, number one
is real estate.

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This is owned by households.

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Actually, they lump in
nonprofits, unfortunately,

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because nonprofit organizations
are like people,

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because nobody owns them.

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So, this is the sum of
everything that ultimate

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owners own, so it's
everything.

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But nonprofits are a small
part of the total.

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So, real estate is
$18 trillion.

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That's real estate owned
directly by households and

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nonprofits.

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It doesn't include commercial
real estate that is owned by

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some of these other things.

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But that's not held by
institutions, that's held

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directly by households.

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But the next item on this thing
is pension funds, and

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that's $13 trillion.

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Almost as big as real estate.

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And what are pension funds?

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These are plans, that either
businesses create for their

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employees, or that people
invest in themselves for

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retirement.

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It's planning for old age.

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Then, there's equity in
non-corporate business.

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Non-corporate business means
family businesses.

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Well, not necessarily family,
but partnerships and family

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businesses.

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You know, the corner store is a

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business, it's worth something.

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The Fed has estimated the total
value of all of these

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non-corporate businesses, and
estimates them at $6 trillion.

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Again, that's not
institutionally held, that's

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held by families and people.

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So far, we've got more family
than institutional.

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But then, as you keep going down
the list, deposits are

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deposits at banks.
$8 trillion.

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That's savings deposits,
time deposits.

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Now, that's institutional
investors managing that.

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Corporate equities, now this
is shares in corporations,

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owned by households.

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That's $8 trillion.

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Now, we're back to households
owning them directly.

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But then, we have
mutual funds.

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Mutual funds are investment
funds for the general public,

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that invest in equities
and sometimes

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bonds and other things.

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And that's almost $5 trillion.

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Consumer durables.

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We're going kind of -- seems
like half and half or maybe a

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little bit less than half are
institutional, but it's a big

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share so far.

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Consumer durables, about
$5 trillion.

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That's your cars, your clothes
that you're wearing, whatever

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else is in your house.

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It's estimated at $5 trillion.

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Treasury securities are --

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now, that's government bonds.

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It might surprise you that
it's only $1 trillion.

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That includes both savings
bonds, which your

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grandmother gave you.

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I don't know if you
got that --

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you got a $100 saving bonds --

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maybe you did.

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But that's only $100, doesn't
add up to much.

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There are big-time treasury
securities that are treasury

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bonds, treasury notes, but they
generally are held by

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institutions, not -- households
just generally

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don't buy them.

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The total national debt is now
-- in the United States it's

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$14 trillion [addition:
approximately, as of April 11,

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2011], but only $1 trillion,
that's only 1/14 of it, is

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held by households.

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So, the institutions hold the
rest. Well, foreigners hold

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some of the rest, too,
but we're not

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counting foreigners here.

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Corporate bonds held directly
by households, $2 trillion.

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Municipal bonds held by
households, $1 trillion.

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But I'll come to this -- the
total municipal bonds

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outstanding are more
like $3 trillion.

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So, households don't hold them
generally, except indirectly

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through institutions.

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Life insurance.

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These are reserves at life
insurance institutions.

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That would be institutional
investors again.

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So, it seems like less than
half, but close to half of all

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of the assets in this
country are held by

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institutional investors.

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This is a change from
100 years ago.

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100 years ago, virtually none
of it would be held by

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institutional investors, so our
society is becoming more

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institutionalized, more and more
things are being done by

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professionals.

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And a related thing I wanted to
mention again is that, as

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society gets more modern, the
importance of the family is

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diminished and the importance
of government

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and business is increased.

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So for example, pension funds
are taking over what used to

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be a family responsibility.

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When Grandma and Grandpa get
old, they move into your house

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and you take care of them.

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That's an extra-financial thing
that has gone on from

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time immemorial.

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But now, it works differently.

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Grandpa and Grandma commit
to a pension fund,

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contribute to it.

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When they get old, they move
to an assisted living

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facility, which is a place where
maybe they're happier.

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I don't know.

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At least they can choose.

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They don't have just the single
choice of living with

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you, which they might
not like.

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They might like it, they might
not, but it's working more

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institutionally.

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So, this is really --

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I wanted to talk about thoughts,
about where our

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society is going, and seeing
the increasing

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professionalization of it.

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I thought to complete this
list I should --

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remember, the previous
slide --

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this $70 trillion is assets
owned by the households.

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But I just wanted to get
you in the right

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perspective on this.

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What about liabilities?

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So, the Federal Reserve Board
computes that, too.

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[addition: The data is as of the
fourth quarter of 2010.]

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Those assets are owned, but
it's not net worth of

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households, because the
households owe money, too.

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So, the biggest debt that
households owe is, in the

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United States, $10 trillion
of home mortgages.

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We saw they have $18 trillion
of real estate, but they owe

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$10 trillion, so that they
have a net worth in real

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estate of only $8 trillion.

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But moreover, consumer credit
is $2.4 trillion.

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That's credit card debt and some
other revolving debt like

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department store cards, or
when you buy something --

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when you buy a car on time, it
would go into that total.

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So, the total liabilities
are $13.9 trillion.

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And then, so household net
worth is the $70 trillion

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assets minus the almost $14
trillion liabilities.

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So, it's $56.8 trillion
is the total assets.

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And in per capita terms,
that's $184,000.

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That would mean that the average
family of four has

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about $800,000 --

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I'm just multiplying
it, 184 by 4.

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That's almost $800,000,
so we're a country of

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millionaires, I guess.

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Or soon to be.

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But the problem is it's not
-- it's only on average.

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This is unequally distributed.

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But I should also add, the U.S.
government has a debt of,

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as of this morning
[addition: April 11, 2011]

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--

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I looked it up on a national
debt clock --

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$14.286 trillion.

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And that's not counted as a
liability of households.

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But it should be, because we
have to pay it, and we're

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going to pay it through
our taxes, eventually.

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So, you might subtract off
another $14 trillion from the

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$56 trillion.

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And then, let's not forget,
there's state and local

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government debt, which is
another $3 trillion [addition:

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approximately, as of
April 11, 2011].

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So, what does that
bring us down to?

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Something like $40
trillion or less.

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I wanted to do that just to get
perspective on what our

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assets and liabilities
look like.

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The other thing is --

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I'm trying to put things in
complete perspective, so I

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wanted to talk also about
something that's not on any of

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this, and that's
human capital.

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Human capital is the value of
our people, and what people

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can do and produce.

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And if you want to develop total
national wealth, you

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would want to include human
capital as well.

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So, what is the national wealth
for the United States,

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if we include everything?

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Well, the way I figured that
is, right now the national

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income, U.S. national income
is $13 trillion a year

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[addition: as of 2010].

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And I want to capitalize
that, to value their

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present value with that.

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If you assume 3% growth in real
terms and a 5% discount

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rate, that would make wealth
equal to $13 trillion --

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I'm using the Gordon
formula --

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divided by 0.05 minus 0.03,
or $260 trillion.

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That's also just for
perspective, because I just

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wanted to put this $40 or $50
trillion in perspective.

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I'm kind of diminishing
my lecture.

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I'm telling you institutional
investors are important, but

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as a fraction of the total
national wealth,

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it's not that important.

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And I think the family is still
very important, as a

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manager of our wealth.

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This is not managed by
institutional investors.

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One more calculation that will
diminish the importance of

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institutional investors
even more.

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What do you think the
world is worth?

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If we were to take the total
national income of the whole

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world, and take the present
value of that, well, according

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to the International Monetary
Fund in Washington, which

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estimates for the world, world
national income in 2010, well,

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world income --

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actually, this is world GDP, I
believe, but I'll use that as

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a proxy for income --

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is $62 trillion.

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And if I use the same discount
rate and assumed growth rates,

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you know what I get for the
value of the world?

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World wealth?

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It's $1.2 quadrillion.

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Again, to put things in
perspective, we are going

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through an enormous transition
in the world.

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I'm only assuming a 3% growth
rate for the world, and many

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countries are growing at 7% to
9% now, so maybe this is

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conservative.

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But I think that, as the world
matures, as we become more and

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more modern and capitalist, the
importance of the family

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will remain.

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It will remain important, but
it will diminish in relative

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importance.

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So, as time goes on, we're going
to see something like a

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quadrillion dollars increasingly
managed by

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institutional investors.

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So that's, what I want
to talk about today.

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As I was saying, in modern
society we do things

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differently.

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We don't expect young people to
take their parents in, to

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care for them.

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I mentioned that
as an example.

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Is that, because we don't care
about our parents as much as

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we used to?

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Interesting question.

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There's a lot of discussion
about that, but my general

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take on it is, that most
elderly people

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like to have choices.

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They love their children,
but they don't want to

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move in with them.

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They want to have a savings,
some kind of pension, they

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want to be able to choose,
how they live, with

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whom they live with.

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Similarly, our health care, we
used to depend on our families

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to provide health care, but
it didn't work very well.

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People weren't getting very
good health care.

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And now, we have it all
institutionalized through

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trust funds for health plans,
and benefits and the like.

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This means that it's
more and more run

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by investment managers.

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And investment managers are
trained in modern finance and

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understand risk management.

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So, there's a professionalism
to all this.

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The family is of limited --

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even if they were smart, even
if they were brilliant as

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investment managers, they're
a small unit.

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And unless they were to engage
in some kind of risk sharing

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agreement, they can't
manage risk well.

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The whole family is too small
a unit to manage risk.

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But increasingly, investment
managers are running risk

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management for families,
that allows risk

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sharing around the world.

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We have growing pains
with this.

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The recent financial crisis
shows that investment managers

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mess up sometimes, and their
attempt to share risks around

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the world --

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like, for example, the subprime
crisis was caused by

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the failure to manage mortgage
risk appropriately.

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But nonetheless, I think
they're getting more

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professional and
more important.

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So, right now we have
professional risk managers

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that are, I think, increasingly
important in our

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very lives.

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Now, they have a
fiduciary duty.

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If you are managing other
people's money --

18:41.000 --> 18:44.860
that's a quote -- ''other
people's money,'' then you

18:44.860 --> 18:46.300
might be negligent.

18:46.300 --> 18:48.390
It's not my money,
what do I care?

18:48.390 --> 18:51.970
So, the law prescribes that you,
as an investment manager,

18:51.970 --> 18:58.190
have a duty to act in the
interest of the person you're

18:58.190 --> 19:06.860
managing for, or the group of
people you're managing for.

19:06.860 --> 19:11.720
And the law has been trying to
prescribe what this duty is.

19:11.720 --> 19:21.850
There's something called the
''prudent person rule,'' which

19:21.850 --> 19:27.020
is a rule that investment
managers have to behave as a

19:27.020 --> 19:30.320
prudent person would.

19:30.320 --> 19:33.070
I'll read one definition
of it.

19:33.070 --> 19:42.820
ERISA, which was an act of
Congress in 1974, defined --

19:42.820 --> 19:45.710
they called it ''prudent man
rule'' back then, because our

19:45.710 --> 19:53.210
language was still
sexist in 1974 --

19:53.210 --> 19:56.370
they said that ''investment
managers running pension funds

19:56.370 --> 20:01.010
must manage with the care,
skill, prudence, and diligence

20:01.010 --> 20:05.950
under the circumstances then
prevailing, that a prudent man

20:05.950 --> 20:11.180
acting in a like capacity and
familiar with such matters

20:11.180 --> 20:15.510
would use in the conduct of an
enterprise of a like character

20:15.510 --> 20:18.190
and with like aims."

20:18.190 --> 20:21.150
They're trying to legislate
what it is

20:21.150 --> 20:23.830
to be a good fiduciary.

20:23.830 --> 20:25.010
And it seems sensible.

20:25.010 --> 20:28.400
You should ask -- if someone is
managing a pension fund for

20:28.400 --> 20:32.300
elderly people, they shouldn't
do wild and crazy investments.

20:32.300 --> 20:34.410
They shouldn't invest
in racehorses or

20:34.410 --> 20:35.600
something like that.

20:35.600 --> 20:37.260
It should be prudent.

20:37.260 --> 20:38.490
But then, how do
you define it?

20:38.490 --> 20:46.990
If you read the act, it says,
they would be acting like a

20:46.990 --> 20:51.780
prudent man ''in a like capacity
in a conduct in an

20:51.780 --> 20:55.970
enterprise of a like character
and was like aims."

20:55.970 --> 20:59.790
The problem is, with the 1974
act, that it's hard to

20:59.790 --> 21:04.440
legislate duty, define
what it is.

21:04.440 --> 21:08.150
So, what the law said, and it
has said it in many places, is

21:08.150 --> 21:10.680
that you have to -- as
a fiduciary, as an

21:10.680 --> 21:12.200
investment manager --

21:12.200 --> 21:16.730
you have to act as a prudent
person would act.

21:16.730 --> 21:18.980
And what is a prudent person?

21:18.980 --> 21:21.780
I guess, it's somebody else.

21:21.780 --> 21:25.190
Somebody else, who
is of a kind of a

21:25.190 --> 21:27.880
standard or ordinary type.

21:27.880 --> 21:28.670
I don't know what it is.

21:28.670 --> 21:31.350
I mean, I could say that
investing in racehorses is the

21:31.350 --> 21:36.180
smartest thing for me to do, but
I can't claim that that's

21:36.180 --> 21:38.030
a prudent person act.

21:38.030 --> 21:41.570
So, the law has required
institutional investors to

21:41.570 --> 21:46.970
some extent to behave, not as
they would behave, but as they

21:46.970 --> 21:51.410
think other people would behave.
It was legislating a

21:51.410 --> 21:54.830
requirement, that you don't do
what you think is smart, you

21:54.830 --> 21:57.970
do what you think other
people think is smart.

21:57.970 --> 22:03.160
And this has been a problem,
because what it has done is,

22:03.160 --> 22:07.920
it has created a class of
institutional investors, who

22:07.920 --> 22:12.820
live in fear of laws that could
come down on them, if

22:12.820 --> 22:17.200
they, with the best of
intentions, invest on behalf

22:17.200 --> 22:23.090
of their clients in an
unconventional way, and

22:23.090 --> 22:26.120
therefore could be punished
for violating the prudent

22:26.120 --> 22:27.370
person rule.

22:31.660 --> 22:35.710
Thus, for example, because of
the prudent person rule,

22:35.710 --> 22:38.750
university endowments, which
are an example of

22:38.750 --> 22:43.300
institutional investments, for
much of the 20th century were

22:43.300 --> 22:48.560
invested in bonds, government
bonds, because they thought,

22:48.560 --> 22:49.400
well, that's prudent.

22:49.400 --> 22:53.120
No one can tell me that
we're not prudent.

22:53.120 --> 22:56.510
The government bond is safe.

22:56.510 --> 23:04.470
But some investment portfolios,
notably

23:04.470 --> 23:07.840
the one that --

23:07.840 --> 23:11.360
we had David Swensen come and
speak to us earlier --

23:11.360 --> 23:14.230
took a more aggressive
interpretation of the prudent

23:14.230 --> 23:21.850
person rule, and developed an
investment strategy that

23:21.850 --> 23:23.310
looked imprudent.

23:23.310 --> 23:27.560
So for example, Yale University
was investing in

23:27.560 --> 23:31.920
startup dot-com firms during
the dot-com explosion --

23:31.920 --> 23:34.350
managed to sell out
just at the peak.

23:34.350 --> 23:37.030
Is that being a prudent
person?

23:37.030 --> 23:40.660
Well, the interpretation of the
prudent person rule has

23:40.660 --> 23:43.770
changed, and this is part
of the phenomenon

23:43.770 --> 23:44.790
that drove the bubble.

23:44.790 --> 23:48.240
Institutional investors,
led by people like

23:48.240 --> 23:50.300
David Swensen --

23:50.300 --> 23:54.670
it lead to a more benign
interpretation of the prudent

23:54.670 --> 23:58.220
person rule, and allowed
them to take chances.

23:58.220 --> 24:03.070
And I think that, that general
sense that one could be more

24:03.070 --> 24:07.380
aggressive in investing, was
part of the bubble that led to

24:07.380 --> 24:08.690
the financial crisis.

24:08.690 --> 24:10.810
I'm not saying it's a bad
thing in itself, but I'm

24:10.810 --> 24:12.550
telling you it was part
of the factors

24:12.550 --> 24:19.550
that led to this bubble.

24:19.550 --> 24:21.320
I looked through Dodd-Frank.

24:21.322 --> 24:29.232
The Dodd-Frank Act of 2010 is
the most important piece of

24:29.230 --> 24:33.720
financial legislation in the
United States since the Great

24:33.720 --> 24:34.890
Depression.

24:34.890 --> 24:38.430
And I did a search for
prudent person --

24:38.430 --> 24:42.720
it appears nowhere.

24:42.720 --> 24:51.920
But I found that the word
prudential standards appeared

24:51.920 --> 24:57.210
34 times in the Dodd-Frank
Act.

24:57.210 --> 25:01.720
So, it seems like the financial
crisis is changing

25:01.720 --> 25:03.780
things a little bit.

25:03.780 --> 25:10.530
It's bringing our society to
want regulators, government

25:10.530 --> 25:15.640
regulators, to be making the
ultimate decisions about what

25:15.640 --> 25:20.500
kind of risks institutional
investors will take on.

25:20.495 --> 25:22.975
They're still letting households
do what they want,

25:22.980 --> 25:26.950
but in terms of institutional
investors, the Dodd-Frank Act

25:26.950 --> 25:31.020
talks extensively about
regulators going in and

25:31.020 --> 25:33.580
regulating what institutional
investors --

25:33.580 --> 25:35.810
what kinds of risk
they can take.

25:35.810 --> 25:38.600
The same thing is true
in other countries.

25:38.600 --> 25:42.210
I think, this is a
world phenomenon.

25:42.210 --> 25:45.510
The problem is that the prudent
person rule didn't

25:45.510 --> 25:48.740
seem to work, didn't seem
to work well enough.

25:48.740 --> 25:52.830
It started out, when it was
first imposed, as encouraging

25:52.830 --> 25:55.570
a very conservative investment,
but then people

25:55.570 --> 25:58.740
thought, as time went on, that
that didn't make sense, they

25:58.740 --> 26:07.360
got more loose, and it let
to a financial crisis.

26:07.360 --> 26:13.280
So, Dodd-Frank is creating
something called the FSOC, the

26:13.280 --> 26:17.040
Financial Stability Oversight
Commission, which

26:17.040 --> 26:20.160
has to enforce --

26:20.160 --> 26:23.260
well, it doesn't enforce, but
it makes recommendations on

26:23.260 --> 26:26.210
prudential standards,
particularly regarding --

26:26.210 --> 26:27.370
well, I wouldn't say
particularly --

26:27.370 --> 26:28.660
but including leverage.

26:31.230 --> 26:32.120
Leverage --

26:32.120 --> 26:33.370
we talked about it --

26:35.730 --> 26:38.180
it's a measure of the risk that
you've imposed on your

26:38.180 --> 26:41.930
portfolio by borrowing
to buy assets.

26:41.930 --> 26:45.920
The economy became increasingly
leveraged up

26:45.920 --> 26:50.980
until the financial crisis,
when it began around 2007.

26:50.980 --> 26:53.360
And people were concerned
about that.

26:53.360 --> 26:56.300
Well, were institutions
following the

26:56.300 --> 26:58.850
prudent person rule?

26:58.850 --> 27:02.520
Well, somehow, as time went on,
their mind allowed more

27:02.520 --> 27:07.570
and more leverage to be
considered acceptable.

27:07.570 --> 27:13.310
So, now what we have in the
Dodd-Frank Act is, that the

27:13.310 --> 27:17.070
Financial Services Oversight
Commission is supposed to

27:17.070 --> 27:21.650
recommend standards of leverage
and prudential

27:21.650 --> 27:26.290
standards for financial
corporations, and to put

27:26.290 --> 27:30.600
financial corporations under
increasing regulatory

27:30.600 --> 27:33.770
authority to meet
those standards.

27:33.770 --> 27:36.400
So, in some sense, it's shifted
to the government.

27:36.400 --> 27:41.460
We had seen a historic shift of
power over investments from

27:41.460 --> 27:44.630
individual investors to
institutional investors, and

27:44.630 --> 27:47.640
to some extent, at least, it's
shifting to the government.

27:51.130 --> 27:51.870
And I think --

27:51.870 --> 27:55.590
I'm talking mostly about the
U.S., but I think this is a

27:55.590 --> 28:00.130
currently worldwide trend.

28:00.130 --> 28:01.210
It's exemplified also --

28:01.210 --> 28:05.540
I mentioned before, that we had
private organizations, the

28:05.540 --> 28:11.010
securities rating agencies such
as Moody's and Standard &

28:11.010 --> 28:15.540
Poor's and Fitch, but the
governments are trusting them

28:15.540 --> 28:18.560
less, and they're putting
standards more on government

28:18.560 --> 28:19.810
regulators now.

28:22.750 --> 28:26.430
I said I would talk about
financial advisors.

28:26.430 --> 28:35.970
Financial advisors are people,
who don't directly manage

28:35.970 --> 28:39.250
portfolios, they're not
institutional investors, but

28:39.250 --> 28:41.430
they give advice to
those who do.

28:43.950 --> 28:51.800
And the financial advisors are
regulated by governments in

28:51.800 --> 28:54.200
most countries.

28:54.200 --> 28:59.750
So in the U.S., for example,
the SEC, the Securities and

28:59.750 --> 29:10.900
Exchange Commission, requires
advisors to be approved by

29:10.900 --> 29:21.230
FINRA, to win FINRA approval,
where FINRA is the successor

29:21.230 --> 29:24.240
to the National Association
of Securities Dealers.

29:24.240 --> 29:31.100
It's a non-government
organization that administers

29:31.100 --> 29:33.980
an examination and education
program for advisors.

29:37.430 --> 29:41.330
And so, you effectively have
to go through FINRA to get

29:41.330 --> 29:43.080
licensed to be a financial
advisor.

29:54.170 --> 29:56.370
I'll give you an example
of an organization

29:56.370 --> 29:58.940
of financial advisors.

29:58.940 --> 30:04.770
NAPFA is the National
Association of Personal

30:04.770 --> 30:15.940
Financial Advisors, that manages
the relation between

30:15.940 --> 30:17.790
financial advisors
and the public.

30:22.020 --> 30:28.010
These people will typically
charge between $75 and $300 an

30:28.010 --> 30:30.690
hour, and you can get
one tomorrow.

30:30.690 --> 30:34.760
Just make a phone call, get on
to a website, NAPFA website,

30:34.760 --> 30:37.090
and hire one.

30:37.090 --> 30:39.690
And they have a code
of standards.

30:39.690 --> 30:42.320
They have to be licensed through
the SEC, and they have

30:42.320 --> 30:46.320
to have an oath of
loyalty to the

30:46.320 --> 30:49.630
client that they undertake.

30:49.630 --> 30:50.840
This is a big business.

30:50.840 --> 30:55.110
I mention it, because in one
of my first lectures I gave

30:55.110 --> 30:57.810
you a count of how many
people there are.

30:57.810 --> 30:59.290
But I'm just trying to --

30:59.290 --> 31:01.550
There's also something else
called a financial planner.

31:05.630 --> 31:06.880
Financial planners.

31:09.490 --> 31:13.100
Now that sounds like the same
thing to me, but somehow, if

31:13.100 --> 31:15.840
you call yourself a financial
planner, you don't have to go

31:15.840 --> 31:18.770
through this licensing.

31:18.770 --> 31:26.860
And in the Dodd-Frank Act,
I didn't find much new

31:26.860 --> 31:28.120
legislation regarding them.

31:28.120 --> 31:30.300
The Dodd-Frank Act is
calling for a study

31:30.295 --> 31:31.905
of financial planners.

31:34.580 --> 31:37.010
The question is, how does the
government get involved in

31:37.010 --> 31:40.660
making these people
give good advice?

31:40.660 --> 31:44.280
The problem is, that the
financial crisis seems to be

31:44.280 --> 31:47.560
led by a lot of bad
advice given out.

31:47.560 --> 31:50.500
A lot of people were encouraged
to leverage up

31:50.500 --> 31:53.570
their ownership in their home,
to borrow heavily to buy

31:53.570 --> 31:54.820
second homes.

31:57.930 --> 32:01.290
I'm sure, that financial
advisors were not uniformly

32:01.290 --> 32:04.090
advising that, or financial
planners, but there's a

32:04.090 --> 32:08.980
concern now about what kind of
advice people were given.

32:08.980 --> 32:13.330
So in 1996, Congress passed a
bill in the United States,

32:13.330 --> 32:17.450
saying that financial advisors
cannot be convicted felons,

32:17.450 --> 32:18.700
among other things.

32:21.070 --> 32:27.660
But there hadn't been, until
then, such a law.

32:27.659 --> 32:30.659
We have something else called
mortgage brokers.

32:30.659 --> 32:31.909
It's a little different.

32:35.600 --> 32:37.100
These are people, who
give advice on

32:37.100 --> 32:39.140
getting a home mortgage.

32:39.139 --> 32:43.419
There was no licensing of them
until the financial crisis.

32:43.420 --> 32:45.070
Because mortgage brokers
could be anything.

32:45.070 --> 32:48.240
They could even be a convicted
felon, until just a few years

32:48.239 --> 32:51.349
ago, until after the crisis.

32:51.354 --> 32:52.784
Here's the fundamental
problem, that

32:52.780 --> 32:54.290
people are getting --

32:54.290 --> 32:57.780
they're confronted by an
increasingly complicated

32:57.780 --> 33:00.190
financial structure.

33:00.190 --> 33:04.760
Living is less family, and
it's more investing and

33:04.760 --> 33:07.080
getting involved in financial
markets, and most people don't

33:07.080 --> 33:08.450
know how to do it.

33:08.449 --> 33:14.759
And that the people, who give
them advice often, are not

33:14.760 --> 33:16.420
giving them the best advice.

33:16.420 --> 33:18.030
What can we do about that?

33:18.030 --> 33:20.910
Well, the government is trying,
but it's imperfect.

33:27.190 --> 33:29.690
I think that, as the world
develops, I think we'll

33:29.690 --> 33:31.230
probably see --

33:31.230 --> 33:34.000
I think there is a trend
toward increasing the

33:34.000 --> 33:39.020
professionalization
of these groups.

33:39.020 --> 33:42.410
And although it's not a simple
matter to straighten out some

33:42.410 --> 33:46.580
of the irregularities, we're
moving, as the world gets

33:46.580 --> 33:49.650
better and better, to even
stronger such institutions.

33:52.565 --> 33:54.985
Now, I wanted to go through
some kinds of

33:54.990 --> 33:56.240
institutional investing.

34:03.080 --> 34:05.870
The mutual fund is --

34:09.410 --> 34:11.880
I've talked about
this before --

34:11.880 --> 34:18.900
is an investment company that
is owned mutually by the

34:18.900 --> 34:20.240
participants.

34:20.240 --> 34:24.050
It will invest typically in
stocks, and it distributes

34:24.050 --> 34:26.600
everything to the owners of the
stock [correction: owners

34:26.600 --> 34:28.300
of the fund].

34:28.295 --> 34:34.935
The first mutual fund was the
Massachusetts Investor Trust.

34:34.940 --> 34:36.990
That's not the university.

34:36.990 --> 34:37.130
Massachusetts --

34:37.130 --> 34:39.020
I'm sorry --

34:39.020 --> 34:44.480
Investment Trust, which was
founded in the 1920s.

34:44.480 --> 34:47.490
And it was very open and direct
with its investors.

34:47.490 --> 34:50.920
It published its portfolio.

34:50.920 --> 34:52.050
It promised --

34:52.050 --> 34:54.680
it was completely open
about what it did --

34:54.680 --> 34:57.650
and it promised nothing more
than it would divide up all of

34:57.650 --> 35:01.050
the returns among the
participants.

35:01.050 --> 35:05.420
There were no senior members,
who got more of the money than

35:05.420 --> 35:08.040
anyone else.

35:08.040 --> 35:11.660
So, MIT became a model
for an investment

35:11.660 --> 35:13.030
fund for the public.

35:13.030 --> 35:20.480
In the 1920s, there were many
investment funds that were

35:20.480 --> 35:21.960
exploitative of the public.

35:21.960 --> 35:25.450
They had two classes of
investors, and the first class

35:25.450 --> 35:28.510
of investors ran off with the
money, at the expense of

35:28.510 --> 35:29.690
everyone else.

35:29.690 --> 35:35.090
So, it took a while after the
1929 crash, but the Investment

35:35.090 --> 35:42.050
Company Act of 1940 set
the stage for the

35:42.050 --> 35:44.850
growth of mutual funds.

35:44.850 --> 35:51.650
And so, mutual funds are
designed for individuals, and

35:51.650 --> 35:52.900
they are --

35:55.120 --> 35:56.360
this is U.S. --

35:56.360 --> 35:59.440
they are a very successful
institution.

35:59.440 --> 36:00.820
So, you know exactly what --

36:00.820 --> 36:02.930
they have regular reports -- you
know exactly what they're

36:02.930 --> 36:08.420
doing, and there's no rich
person benefiting excessively

36:08.420 --> 36:10.340
from what happens.

36:10.340 --> 36:17.910
In Europe, they have an
analogous institution, UCITS.

36:17.910 --> 36:24.190
It refers to a European Union
directive, called the

36:24.190 --> 36:27.980
Undertaking for Collective
Investment and Transferable

36:27.980 --> 36:35.160
Securities, which is an
EU directive, 1985

36:35.157 --> 36:35.287
[clarification: In 1985, it
was still the European

36:35.293 --> 36:35.463
Communities, and not yet the EU,
which was not established

36:35.463 --> 36:42.483
until 1993.], and then they had
revisions in 2001, that

36:42.480 --> 36:45.840
creates a standard investment
fund like a

36:45.840 --> 36:47.620
mutual fund for Europe.

36:47.615 --> 36:50.965
It used to be that every
European country had its own

36:50.970 --> 36:54.990
securities law, and it made it
difficult, because there's so

36:54.990 --> 36:56.600
many European countries.

36:56.600 --> 36:59.970
So, they standardized, and
they developed a sort of

36:59.970 --> 37:02.170
European version of
the mutual fund.

37:02.170 --> 37:05.210
The key difference, I think,
between a mutual fund in the

37:05.210 --> 37:09.090
U.S. and a UCITS
in Europe is --

37:09.090 --> 37:09.860
it's technical --

37:09.860 --> 37:11.450
it's how they're taxed.

37:11.450 --> 37:14.130
The mutual fund in the
United States --

37:14.130 --> 37:17.830
if you own shares in a mutual
fund and you just hold them,

37:17.830 --> 37:21.960
you will still get capital gains
taxes every year, even

37:21.960 --> 37:23.560
if you didn't sell it.

37:23.560 --> 37:26.370
Because other people in the
mutual fund sell some of their

37:26.370 --> 37:30.160
shares, generating a capital
gains, and that capital gains

37:30.160 --> 37:32.680
is then distributed to all
of the participants

37:32.680 --> 37:34.180
in the mutual fund.

37:34.180 --> 37:38.290
With a UCITS in Europe, you
don't pay capital gains taxes,

37:38.290 --> 37:41.190
unless you yourself sell.

37:41.190 --> 37:44.680
So, I think the UCITS
form is gaining on

37:44.680 --> 37:46.950
the mutual fund form.

37:46.950 --> 37:50.700
And some people, notably
Robert Pozen at Harvard

37:50.700 --> 37:54.630
Business School is advocating
that the U.S. switch to the

37:54.630 --> 37:55.880
European standard.

37:58.120 --> 37:59.680
I wanted to talk about trusts.

38:07.020 --> 38:09.490
What is a trust?

38:09.490 --> 38:18.000
It is money held on behalf
of another individual.

38:18.000 --> 38:25.390
Well, particularly a personal
trust is something, that you

38:25.390 --> 38:32.050
can set up on behalf of another
person or a cause, so

38:32.050 --> 38:37.820
that an institutional investor
will manage money on behalf of

38:37.820 --> 38:39.750
that person or cause.

38:39.750 --> 38:46.090
And a company that does trusts
is called a trust company, and

38:46.090 --> 38:50.230
trust companies have often been
combined with banks, but

38:50.230 --> 38:52.740
they're not necessarily
part of a bank.

38:52.740 --> 38:56.100
You see many institutions and
the title will be Bank and

38:56.097 --> 38:57.857
Trust Company.

38:57.860 --> 38:58.960
Well, you know what
a bank does.

38:58.960 --> 39:01.120
It takes deposits
and makes loans.

39:01.120 --> 39:03.850
What does a trust company do?

39:03.850 --> 39:10.130
It creates trusts on behalf of
some person and manages the

39:10.130 --> 39:10.910
money for them.

39:10.910 --> 39:14.610
A classic example of a trust
is, imagine that you have a

39:14.610 --> 39:21.670
child, who is handicapped in
some way and unable to manage

39:21.670 --> 39:25.400
his or her own affairs.

39:25.400 --> 39:29.240
And you, as a parent, know that
your child will outlive

39:29.240 --> 39:33.050
you, and so how do you
provide for the child

39:33.050 --> 39:35.280
after you are gone?

39:35.280 --> 39:38.720
Well, you create a trust
for the child.

39:38.720 --> 39:42.960
And you can go to a trust
company and say, I want an

39:42.960 --> 39:46.660
income for my child, managed
for the rest of my child's

39:46.660 --> 39:49.940
life, and the bank will outlive
you -- or the trust

39:49.940 --> 39:52.480
company will outlive you
-- and can do that.

39:52.480 --> 39:56.910
So, this is very important,
because it allows people to

39:56.910 --> 40:01.520
create situations that
outlive them.

40:04.020 --> 40:09.700
But particularly in common law
countries, it doesn't have to

40:09.700 --> 40:10.520
be a company.

40:10.520 --> 40:14.140
You can set up a trust, you can
take a young relative of

40:14.140 --> 40:17.350
yours, who will outlive you, and
say, I want you to be the

40:17.350 --> 40:20.760
trust manager for my child.

40:20.760 --> 40:25.370
And if you become ill, can
you appoint a successor?

40:25.370 --> 40:27.290
You can do that, too.

40:27.290 --> 40:31.470
U.S. trust law recognizes the
importance of trusts, and so

40:31.470 --> 40:34.430
that person -- suppose that
person that you appoint as a

40:34.430 --> 40:37.850
trustee for your child, suppose
that person goes

40:37.850 --> 40:41.110
bankrupt, and then other people
are taking, seizing,

40:41.110 --> 40:42.670
that person's assets.

40:42.670 --> 40:47.150
They could not take the assets
in the trust, because the law

40:47.150 --> 40:49.080
recognizes the importance
of trusts.

40:55.990 --> 40:57.370
There are different
kinds of trusts.

40:57.370 --> 40:59.510
But I thought, I should tell
you about a particular kind

40:59.510 --> 41:04.720
that may be relevant to some
of you in your future.

41:04.720 --> 41:07.620
There's a certain kind of trust
called a ''spendthrift

41:07.620 --> 41:15.940
trust,'' which is a trust that
your parents may be setting up

41:15.940 --> 41:17.040
for you now.

41:17.040 --> 41:18.890
I don't know.

41:18.890 --> 41:20.750
What is a spendthrift?

41:20.750 --> 41:24.200
A spendthrift is someone who
spends money to freely.

41:24.200 --> 41:26.440
Can't be trusted to
manage money.

41:26.440 --> 41:29.740
Suppose, you have a child, who's
like that, and you're

41:29.740 --> 41:32.530
getting on in years, and you're
thinking that you could

41:32.530 --> 41:33.830
leave a will to your child.

41:37.270 --> 41:41.140
But the child might
just blow it.

41:41.140 --> 41:43.940
So, what you do is, you go to a
trust company, and you say,

41:43.940 --> 41:46.430
I'd like to set up a spendthrift
trust for my

41:46.430 --> 41:51.110
child, and after I die, the
trust will pay my child an

41:51.110 --> 41:54.810
income, and the child
cannot get at the

41:54.810 --> 41:58.300
assets, only the income.

41:58.300 --> 42:01.280
And so, you manage it, and the
child comes to you and says, I

42:01.275 --> 42:04.905
want the money, and
you say, sorry.

42:04.910 --> 42:07.450
Your parents set up a
spendthrift trust. That's all

42:07.450 --> 42:09.120
you can get.

42:09.120 --> 42:11.220
There's various reasons
why they do this.

42:11.220 --> 42:15.980
One of them is, that in a
divorce, if your child gets

42:15.980 --> 42:21.460
divorced, if you gave money to
the children, the divorce

42:21.460 --> 42:26.710
court might give half of the
money to the awful spouse your

42:26.710 --> 42:28.100
child married.

42:28.100 --> 42:30.170
But if it's a spendthrift trust,
they can't get at it.

42:30.170 --> 42:32.350
It's income to the child.

42:32.350 --> 42:33.860
So, there's all kinds
of reasons why

42:33.860 --> 42:35.690
people set up trusts.

42:35.690 --> 42:38.020
But I think trusts are a really
an important invention

42:38.020 --> 42:41.020
in our society, and they're not
talked about very much.

42:41.020 --> 42:43.590
But I mean, it solves
a real problem.

42:43.590 --> 42:46.200
This handicapped child problem
is an extreme case,

42:46.200 --> 42:47.630
but it's very real.

42:47.630 --> 42:51.330
You can have assurance, the law
makes it clear that that

42:51.330 --> 42:55.000
money is managed by a
professional for the child.

42:58.200 --> 43:04.410
These are real and important
institutions that help people

43:04.410 --> 43:09.890
get on with their lives, and I
think our financial system

43:09.890 --> 43:13.670
does a lot to make these
things work well.

43:13.670 --> 43:16.850
I wanted to talk about
pensions because --

43:16.850 --> 43:19.980
I've already talked about them,
but people do get old

43:19.980 --> 43:22.640
and they can't keep working.

43:22.640 --> 43:27.530
And if you look at the history
of the world, the fate of

43:27.530 --> 43:31.180
elderly people is
highly variable.

43:31.180 --> 43:34.140
Many of them, if they have good
and dutiful children,

43:34.140 --> 43:35.580
will do all right --

43:35.580 --> 43:36.830
who take care of them.

43:36.830 --> 43:39.530
But in the past, you would find
a lot of elderly people

43:39.530 --> 43:43.200
out on the streets begging,
because they didn't have

43:43.200 --> 43:46.470
children, or the children died,
or the children lost

43:46.470 --> 43:47.720
their income.

43:50.360 --> 43:52.890
It's a problem that we've worked
substantially to solve,

43:52.885 --> 43:58.965
and again, it's an example of
progress of our civilization.

43:58.970 --> 44:01.370
We take it for granted, that
people are living as

44:01.370 --> 44:06.790
comfortably as well as they are,
but it's substantially a

44:06.790 --> 44:09.600
product of invention.

44:09.600 --> 44:12.290
So, the idea of a pension
is actually a

44:12.290 --> 44:16.310
relatively new idea.

44:16.310 --> 44:29.130
The first U.S. pension
plan was 1875.

44:29.130 --> 44:33.830
American Express Company
set up a pension

44:33.830 --> 44:36.500
plan for its employees.

44:36.500 --> 44:40.450
There's actually an earlier
example in the U.K., I think,

44:40.450 --> 44:42.380
but I don't have the
name of it here.

44:42.380 --> 44:45.990
But only something like
20 years earlier.

44:45.990 --> 44:48.800
So, until then, there was
never a pension plan.

44:51.330 --> 44:54.990
So, American Express set up a
plan, and it said employees,

44:54.990 --> 44:56.220
who had worked at --

44:56.220 --> 44:59.520
this, by the way, is not the
credit card company, this was

44:59.520 --> 45:01.080
a delivery company.

45:01.080 --> 45:02.270
They had stagecoaches.

45:02.270 --> 45:04.640
This is a long time ago.

45:04.640 --> 45:10.110
And if you worked there for 20
years, past age 60, and were

45:10.110 --> 45:14.660
disabled, you would get 50% of
the average of the last 10

45:14.660 --> 45:16.590
years pay for life.

45:16.590 --> 45:18.240
This was the model --

45:18.240 --> 45:26.920
50% of average of the last 10
years pay on retirement.

45:26.920 --> 45:29.050
Because it was tied to
how much income.

45:29.050 --> 45:30.980
They thought, you could live
on half the income that you

45:30.980 --> 45:32.570
earned when you were working.

45:35.990 --> 45:42.530
In 1901, Carnegie Steel --

45:42.530 --> 45:46.620
that's Andrew Carnegie, the
same Andrew Carnegie, who

45:46.620 --> 45:48.370
wrote The Gospel of Wealth
that we've been

45:48.370 --> 45:50.340
talking about --

45:50.340 --> 45:58.340
gave what was the first large
industrial pension fund.

45:58.340 --> 46:04.100
And it covered a substantial
number of people, it was a

46:04.100 --> 46:09.600
milestone that suggested many
more such pension funds.

46:09.600 --> 46:13.430
Unions, in the early 20th
century, started setting up

46:13.430 --> 46:15.290
pension funds.

46:15.290 --> 46:18.840
For example, the Pattern Makers
in 1900, the Granite

46:18.840 --> 46:23.340
Cutters and Cigar Makers
in 1905, et cetera.

46:23.340 --> 46:26.990
The union pension funds became
popular in the early 20th

46:26.990 --> 46:31.300
century, but there
was a collapse of

46:31.300 --> 46:36.540
pensions after 1929.

46:36.540 --> 46:44.530
Many people were promised
pensions in the first three

46:44.530 --> 46:47.160
decades of the 20th century,
and then the companies just

46:47.160 --> 46:50.720
went out of business
and didn't --

46:50.720 --> 46:54.950
moreover, the unions' pension
funds failed especially

46:54.950 --> 46:56.200
disastrously.

46:58.760 --> 47:02.120
They didn't manage their money
well, or the institutional

47:02.120 --> 47:09.400
investors were not
very astute.

47:09.400 --> 47:11.820
You know, it's like the world
was very amateurish about how

47:11.820 --> 47:12.720
they handled these things.

47:12.720 --> 47:15.560
Obviously, it's very important
that people have money to

47:15.560 --> 47:22.640
retire on, but many of them got
wiped out in 1929, so it

47:22.640 --> 47:27.170
lead to further thinking
about pensions.

47:27.170 --> 47:34.850
The General Motors pension plan
was a landmark pension

47:34.850 --> 47:37.300
plan in 1950.

47:37.300 --> 47:44.430
And in 1950, GM chairman Charles
Wilson proposed a

47:44.430 --> 47:46.690
fully funded pension plan.

47:46.690 --> 47:47.940
This was a new idea.

47:51.210 --> 47:55.070
That is, General Motors, in
promising to pay you in your

47:55.070 --> 48:01.060
retirement, would set aside and
invest now enough money,

48:01.060 --> 48:03.220
so that they would have that.

48:03.215 --> 48:06.755
In other words, they created
a trust for the employees.

48:06.760 --> 48:10.530
So, it's just like the parent
for the handicapped child.

48:10.530 --> 48:13.720
If General Motors dies, doesn't
matter, because

48:13.720 --> 48:16.760
there's a trust managing
their pension fund.

48:16.760 --> 48:18.200
You know, it's kind
of a funny idea.

48:18.200 --> 48:21.570
Why didn't anyone
do that before?

48:21.570 --> 48:24.850
Why didn't the unions, who were
looking out for the union

48:24.850 --> 48:30.930
employees, demand that they
fund their pension funds?

48:30.930 --> 48:34.370
You know, it seems like
financial history shows a lot

48:34.370 --> 48:35.890
of stupidity.

48:35.890 --> 48:38.230
I don't quite understand,
how it could be.

48:38.230 --> 48:40.820
It seems obvious, doesn't it,
that if a company is going to

48:40.820 --> 48:42.980
promise you for a pension,
that they

48:42.980 --> 48:44.050
should set aside money?

48:44.050 --> 48:47.560
Because companies fail
all the time.

48:47.560 --> 48:51.660
There may have been some union
complicity, that the unions

48:51.660 --> 48:58.780
were not really always working
on behalf of their members.

48:58.780 --> 49:01.550
They thought, well, the members
don't think about this

49:01.550 --> 49:03.750
problem, so we're not going
to think about it, either.

49:03.750 --> 49:06.160
It's going to come years
down the road, we're

49:06.160 --> 49:08.790
not going to worry.

49:08.790 --> 49:13.100
So, General Motors, in
1950, set an example

49:13.100 --> 49:17.050
for funding the pensions.

49:17.050 --> 49:20.560
It's very important.

49:20.560 --> 49:25.120
And more and more firms started
to do that after 1950.

49:25.120 --> 49:32.780
But the next thing I want
to give is Studebaker.

49:32.778 --> 49:35.318
Do you remember Studebaker?

49:35.320 --> 49:39.600
They were one of the major
automobile manufacturers.

49:39.600 --> 49:41.800
You maybe don't remember
them, because they

49:41.800 --> 49:45.420
went bankrupt in 1963.

49:45.420 --> 49:49.370
That's a long time ago for you,
but they were around.

49:51.930 --> 49:56.960
Well, they had a pension plan
that was partly funded, but

49:56.960 --> 50:00.430
inadequately funded, and, when
they went out of business,

50:00.430 --> 50:09.710
their employees lost. So, this
led to arguments about --

50:09.710 --> 50:12.590
and their labor union, again,
the United Autoworkers,

50:12.590 --> 50:16.770
supposedly standing up for the
employees, didn't do the job.

50:16.770 --> 50:19.680
So, the whole idea of labor
management negotiating,

50:19.680 --> 50:23.310
protecting the workers seemed
flawed, and so the government

50:23.310 --> 50:27.820
got involved, and
it led to ERISA,

50:27.820 --> 50:29.950
which I mentioned before.

50:29.950 --> 50:33.310
1974.

50:33.310 --> 50:36.040
ERISA stands for Employment
Retirement

50:36.040 --> 50:38.720
Income Security Act.

50:38.720 --> 50:43.180
This was an act to clean up
pension funds, and make them

50:43.180 --> 50:45.050
work well, make them
work better.

50:49.170 --> 50:52.460
The government wanted to make
sure, not only that pension

50:52.460 --> 50:55.510
plans said they were funded,
but that they were really

50:55.510 --> 51:00.840
funded, so that another
bankruptcy wouldn't cause

51:00.840 --> 51:02.620
pension plans to fail.

51:02.620 --> 51:07.600
So, ERISA set up a new
government agency, called the

51:07.600 --> 51:11.710
Pension Benefits Guarantee
Corporation.

51:11.710 --> 51:14.110
That's PBGC.

51:14.110 --> 51:19.920
The Pension Benefits Guarantee
Corporation is a government

51:19.920 --> 51:27.050
organization that insures the
funding of pension plans.

51:27.050 --> 51:33.930
So, pension plans not only have
to undergo scrutiny by

51:33.930 --> 51:39.550
the PBGC that they are fully
funded, but they also have to

51:39.550 --> 51:44.160
pay an insurance premium
to the PBGC.

51:44.160 --> 51:48.140
And if it turns out that they're
not fully funded, then

51:48.140 --> 51:55.690
the PBGC will come in and
replace the lost income.

51:55.690 --> 52:00.050
You see, over the century we're
trying to come up with

52:00.050 --> 52:09.890
financial structures that solve
basic human problems.

52:09.890 --> 52:13.210
The PBGC, by the way, is still
here, and it hasn't gone

52:13.210 --> 52:15.560
bankrupt, despite this
financial crisis.

52:15.560 --> 52:17.950
Though people were worried
about it, it

52:17.950 --> 52:21.530
has managed to survive.

52:21.530 --> 52:23.480
After 1974 --

52:23.480 --> 52:24.990
shortly after this --

52:24.990 --> 52:31.330
after 1974, a new kind of
pension plan became popular.

52:31.330 --> 52:36.700
So, ERISA was written in an age
of defined benefit pension

52:36.700 --> 52:44.070
plans, like the original
American Express pension plan.

52:44.070 --> 52:46.850
What did American Express
pension plan in

52:46.850 --> 52:48.770
1875 promise you?

52:48.770 --> 52:52.060
It promised you half of
your average income

52:52.060 --> 52:54.490
for the last 10 years.

52:54.490 --> 52:56.810
And if you're going to fund
the pension plan, you're

52:56.810 --> 52:59.970
presenting a problem to the
managers of the pension money.

52:59.970 --> 53:02.040
They have to hit that target.

53:02.040 --> 53:08.640
They're told, the pension plan
has an obligation to fund the

53:08.640 --> 53:13.100
payments equal to whatever
percent of last year's income.

53:13.100 --> 53:15.300
And that's kind of a tricky
problem, if you're a manager.

53:15.300 --> 53:16.640
How do I do that?

53:16.640 --> 53:17.870
How do I hit that target?

53:17.870 --> 53:20.360
How do I know, how much
money to set aside?

53:20.360 --> 53:23.090
Well, it's getting now into
government regulators, and

53:23.090 --> 53:28.030
prudent person rules,
and it's tricky.

53:28.030 --> 53:32.710
But the point is that in 1974,
almost all pension

53:32.710 --> 53:33.910
plans were like that.

53:33.910 --> 53:36.090
They defined the benefit
that you would

53:36.090 --> 53:38.440
receive when you retired.

53:38.440 --> 53:43.290
But afterwards, in the 1980s,
companies started offering a

53:43.290 --> 53:47.190
new kind of pension plan, called
a defined contribution.

53:50.720 --> 53:58.140
The idea was, it's hard for us
to hit that target, of say 50%

53:58.140 --> 54:00.780
of your average income for
the last 10 years.

54:00.780 --> 54:02.630
How do you expect
us to do that?

54:02.630 --> 54:04.830
We don't know, how much these
investments will pay out.

54:04.830 --> 54:07.410
We don't even know, how much
money you'll be paid in your

54:07.410 --> 54:08.100
last 10 years.

54:08.100 --> 54:11.560
So, it's asking us to
do the impossible.

54:11.560 --> 54:14.100
Well, it's not impossible,
but it is difficult.

54:14.100 --> 54:20.830
So, many companies decided,
instead of requiring a defined

54:20.830 --> 54:24.400
amount to be paid, they would
just define the contribution

54:24.400 --> 54:26.850
they'll make to your
portfolio.

54:26.850 --> 54:32.870
They give you a portfolio as
an employee, and you get

54:32.870 --> 54:37.840
whatever income that portfolio
generates when you retire.

54:37.835 --> 54:42.705
The most famous example of that
is a 401(k) plan in the

54:42.710 --> 54:44.590
United States.

54:44.590 --> 54:48.940
But ever since, shortly after
ERISA, the world has been

54:48.940 --> 54:53.110
moving towards defined
contribution pension plans,

54:53.110 --> 55:00.080
where a defined contribution
pension plan doesn't promise

55:00.080 --> 55:01.330
what you'll get in retirement.

55:09.250 --> 55:12.680
So then, a portfolio manager
for a defined contribution

55:12.680 --> 55:17.640
pension plan doesn't have to
worry about hitting targets.

55:17.640 --> 55:20.410
And in fact, the way defined
contribution plans are usually

55:20.410 --> 55:24.760
set up, they give the individual
employee the choice

55:24.760 --> 55:27.840
of the main portfolio allocation
between stocks and

55:27.840 --> 55:31.950
bonds and real estate,
or whatever.

55:31.950 --> 55:35.180
But you have investment managers
managing within one

55:35.180 --> 55:36.500
of those asset classes.

55:36.500 --> 55:41.200
So, there will be someone
managing an equity fund,

55:41.200 --> 55:45.400
another one managing a bond
fund, and they try to do as

55:45.400 --> 55:49.510
well as they can as investors,
subject to the restriction of

55:49.510 --> 55:54.390
what they invest in, and it's
left to the client to choose

55:54.390 --> 55:56.950
the allocation.

55:56.950 --> 55:59.720
Defined contribution plans
are going through

55:59.720 --> 56:01.310
growing pains, too.

56:01.310 --> 56:03.710
We still don't have the
perfect system.

56:03.710 --> 56:06.720
The problem with defined
contribution plans --

56:06.720 --> 56:13.090
one problem is, that you don't
have to sign up for them, the

56:13.090 --> 56:14.420
way they've been set up.

56:14.420 --> 56:17.700
It used to be, under the old
days, defined benefit plans,

56:17.700 --> 56:22.010
it was just automatically, every
employee would get the

56:22.010 --> 56:23.140
pension plan.

56:23.140 --> 56:25.940
But with a defined contribution
plan, the typical

56:25.940 --> 56:31.980
rule was, that the company
would ask you to make

56:31.980 --> 56:35.340
contributions out of your
paycheck to the plan, and the

56:35.340 --> 56:37.990
company with then match them,
typically, with additional

56:37.990 --> 56:39.800
contributions.

56:39.800 --> 56:43.100
But something like a quarter of
the people would choose not

56:43.100 --> 56:45.970
to participate --

56:45.970 --> 56:47.860
that's, because they're not
thinking, they're not

56:47.860 --> 56:49.180
thinking ahead --

56:49.180 --> 56:51.240
and so, when they come to
retire, they don't have any

56:51.240 --> 56:54.030
pension plan.

56:54.030 --> 56:56.100
Moreover, some of them
take the most

56:56.100 --> 56:57.500
risky investment offered.

56:57.500 --> 57:00.330
They might put it all in the
stock market, and if the stock

57:00.330 --> 57:03.700
market does badly, they might
end up poor in retirement.

57:06.820 --> 57:11.580
And companies generally would
not give any advice to the

57:11.580 --> 57:14.290
people, who were employees,
because they didn't want to be

57:14.290 --> 57:16.620
liable for giving bad advice.

57:16.620 --> 57:18.300
So, it led to kind
of an amateur

57:18.300 --> 57:20.920
investing for pension plans.

57:23.910 --> 57:34.740
So, there has been work to try
to fix that, and I think

57:34.740 --> 57:38.000
federal legislation has made
it easier for companies to

57:38.000 --> 57:40.910
give advice to employees.

57:40.910 --> 57:43.590
They've also allowed, recently,
in the last few

57:43.590 --> 57:47.240
years, for companies to
automatically enroll employees

57:47.240 --> 57:58.880
in a pension plan, and allow
them to make allocations, if

57:58.880 --> 58:01.030
they didn't hear anything
from the employees.

58:01.030 --> 58:05.070
In other words, they'll put you
into a prudent allocation,

58:05.070 --> 58:06.720
and then you're actually
there.

58:06.720 --> 58:08.720
You're in it, because
you've said nothing.

58:13.030 --> 58:16.020
That's working towards
solving the problem.

58:16.020 --> 58:19.380
We still don't have, I think,
the ideal solution to any of

58:19.380 --> 58:20.630
these things.

58:23.280 --> 58:24.950
So, I've talked about
pension plans.

58:24.950 --> 58:29.080
Let me move on to endowments.

58:29.080 --> 58:35.470
Endowment managers, of which
David Swensen is one.

58:35.470 --> 58:42.280
So, an endowment manages a
portfolio for some cause or

58:42.280 --> 58:47.360
some purpose, like
a university.

58:47.360 --> 58:55.280
And the history of endowments
is one of great --

58:55.280 --> 59:00.260
it's just amazing to me, how
many serious mistakes were

59:00.260 --> 59:04.400
made in history, but we're
gradually becoming more

59:04.400 --> 59:05.570
professional.

59:05.570 --> 59:09.860
So, I give you an example
of a mistake.

59:09.860 --> 59:14.550
This is in Swensen's book.

59:14.550 --> 59:21.230
In 1825, Yale University put
its entire endowment in an

59:21.230 --> 59:23.830
investment in the Eagle
Bank of New Haven.

59:26.490 --> 59:29.220
You know what happened?

59:29.220 --> 59:30.940
It went to zero.

59:30.940 --> 59:32.590
It ended up with nothing.

59:32.590 --> 59:37.190
So, Yale had no endowment
after 1825.

59:37.190 --> 59:42.460
So, Elihu Yale may have given
us money, and we should have

59:42.460 --> 59:46.440
turned it into a pretty tidy
sum, compound interest from

59:46.440 --> 59:50.790
1700 to 1825, but we
blew it completely.

59:50.790 --> 59:53.180
This is the first thing you
learn, in a portfolio you

59:53.180 --> 59:57.020
don't put all of your money
in one investment.

59:57.020 --> 59:59.310
But Yale University did that.

59:59.310 --> 1:00:03.690
By the way, I was looking it
up, 1825 was the year that

1:00:03.690 --> 1:00:08.190
Yale College introduced the
economics requirement, or they

1:00:08.190 --> 1:00:10.640
called it political economy.

1:00:10.640 --> 1:00:13.840
Before that there were no
economics courses at Yale.

1:00:13.840 --> 1:00:16.110
But maybe it was this experience
that made them do

1:00:16.110 --> 1:00:20.870
that in 1825.

1:00:20.870 --> 1:00:24.010
So, I'm going to give
you another example.

1:00:24.010 --> 1:00:25.620
Boston University --

1:00:25.620 --> 1:00:27.190
this is much more recent --

1:00:27.190 --> 1:00:32.070
under John Silber, invested not
the whole endowment of the

1:00:32.070 --> 1:00:36.380
university, but $90 million in
one company called Seragen,

1:00:36.380 --> 1:00:40.880
which was a genetic engineering
company.

1:00:40.880 --> 1:00:45.890
And just John Silber decided to
do this, and he lost Boston

1:00:45.890 --> 1:00:56.240
University 90% of $90 million.

1:00:56.240 --> 1:01:00.750
University of Bridgeport, not
far from here, blew its whole

1:01:00.750 --> 1:01:07.280
endowment, and ended up having
to join the Unification Church

1:01:07.280 --> 1:01:08.280
to survive.

1:01:08.280 --> 1:01:10.300
I think that somehow that's
been undone since then.

1:01:10.300 --> 1:01:13.670
I'm not sure of the details.

1:01:13.670 --> 1:01:16.500
It may not have been, what they
would have done, if they

1:01:16.500 --> 1:01:17.890
had had an endowment.

1:01:17.890 --> 1:01:21.320
See, what Swenson thinks is,
what he's doing is protecting

1:01:21.320 --> 1:01:27.180
the ability of a university to
undergo its financial mission.

1:01:27.180 --> 1:01:33.240
And so, because Swenson was
not overly constrained by

1:01:33.240 --> 1:01:38.430
prudent person rules, because
he was free to invest in a

1:01:38.430 --> 1:01:42.350
high intellectual standard, he's
made it possible for Yale

1:01:42.345 --> 1:01:46.045
to pursue its educational
objectives.

1:01:46.050 --> 1:01:49.250
Right now at Yale University,
like other successful

1:01:49.250 --> 1:01:53.380
endowment universities, graduate
students get their

1:01:53.380 --> 1:01:57.750
whole tuition paid, plus
a living allowance.

1:01:57.750 --> 1:02:01.890
It's like a job, coming to
be a graduate student.

1:02:01.890 --> 1:02:03.510
The university pays --

1:02:03.510 --> 1:02:04.800
you should know this,
if you're thinking

1:02:04.800 --> 1:02:07.190
of getting a PhD.

1:02:07.190 --> 1:02:09.000
Come to one of these
universities, and they'll pay

1:02:09.000 --> 1:02:13.200
you something like $25,000
a year, something

1:02:13.200 --> 1:02:14.450
like that to --

1:02:17.810 --> 1:02:19.500
that's a pretty good deal.

1:02:19.500 --> 1:02:22.130
It's not a deal, it's a gift.

1:02:22.130 --> 1:02:26.030
It's the generosity of the
alumni, and it's the success

1:02:26.030 --> 1:02:28.360
of the investment strategy
that makes that possible.

1:02:34.500 --> 1:02:36.310
And then, I wanted to talk
about another kind of

1:02:36.310 --> 1:02:41.680
institutional investor, and this
will bring me back to my

1:02:41.680 --> 1:02:48.360
discussion of the family.

1:02:48.360 --> 1:02:52.600
I started out by saying that the
family is the fundamental

1:02:52.600 --> 1:02:54.530
unit of our society.

1:02:54.530 --> 1:02:56.790
Its demise has been predicted.

1:02:56.790 --> 1:03:01.660
Remember that in the Communist
Manifesto, Karl Marx said

1:03:01.660 --> 1:03:04.080
we're going to end the family
as an economic unit?

1:03:04.080 --> 1:03:05.120
Something like that.

1:03:05.120 --> 1:03:07.840
Didn't happen.

1:03:07.840 --> 1:03:14.730
It's too ingrained in our genes
or our long history.

1:03:14.730 --> 1:03:18.790
So, I thought, I should come
back and talk about family

1:03:18.790 --> 1:03:28.440
offices and family foundations,
although these

1:03:28.440 --> 1:03:31.520
apply only to the more wealthy
people in our society.

1:03:31.520 --> 1:03:33.870
What is a family office?

1:03:33.870 --> 1:03:35.120
These are --

1:03:38.570 --> 1:03:41.110
people who have $100
million or more

1:03:41.110 --> 1:03:42.130
typically set these up.

1:03:42.130 --> 1:03:42.980
Maybe even less.

1:03:42.980 --> 1:03:46.270
Maybe, with $20 million
in assets.

1:03:46.270 --> 1:03:51.900
But if you have $100 million
in assets, 5% income is $5

1:03:51.900 --> 1:03:53.150
million a year, right?

1:03:57.130 --> 1:04:03.140
It would be sensible to take on
some full-time employees to

1:04:03.140 --> 1:04:05.860
manage your family portfolio,
and so that's

1:04:05.860 --> 1:04:09.860
called a family office.

1:04:09.860 --> 1:04:15.970
I recently spoke at a family
office forum, down in Florida.

1:04:15.970 --> 1:04:17.510
They seemed to be
very numerous.

1:04:17.510 --> 1:04:19.600
There's an awful lot
of families.

1:04:19.600 --> 1:04:22.650
The families come to these
conventions, and they hear

1:04:22.650 --> 1:04:24.110
people like me speak.

1:04:24.110 --> 1:04:26.260
Although I'm different than most
of them, because most of

1:04:26.260 --> 1:04:29.310
the people speaking there wanted
to sell products, and I

1:04:29.310 --> 1:04:30.560
wasn't there to sell anything.

1:04:34.540 --> 1:04:37.390
So, they typically have two or
three or five people working

1:04:37.390 --> 1:04:40.670
full-time, managing their
portfolio and planning things

1:04:40.670 --> 1:04:41.990
like trusts for the children.

1:04:45.700 --> 1:04:47.480
And then, there's something
else called a family

1:04:47.480 --> 1:04:48.180
foundation.

1:04:48.180 --> 1:04:51.630
A family office is for the
family, and there's something

1:04:51.630 --> 1:04:54.090
else called a family
foundation.

1:04:56.780 --> 1:05:00.900
And this is different from a
family office, but they could

1:05:00.900 --> 1:05:03.720
be interrelated, and I
think most wealthy

1:05:03.720 --> 1:05:05.280
families have both.

1:05:05.280 --> 1:05:09.770
A family foundation is a
charitable organization,

1:05:09.770 --> 1:05:15.830
created by a family with the
name of the family typically

1:05:15.830 --> 1:05:17.080
on the foundation.

1:05:24.280 --> 1:05:28.070
I think that most wealthy
familes -- or actually, I

1:05:28.070 --> 1:05:28.270
don't know.

1:05:28.270 --> 1:05:30.420
A large number of wealthy
families, at least in the

1:05:30.420 --> 1:05:33.500
United States, now set up
family foundations.

1:05:33.500 --> 1:05:35.720
And the reason they do that --

1:05:35.720 --> 1:05:37.400
well, why do they do that?

1:05:37.400 --> 1:05:39.320
I think it's partly, because,
when you're wealthy, you

1:05:39.320 --> 1:05:43.950
realize that you can't spend
it all on yourself.

1:05:43.950 --> 1:05:49.670
And you reflect on yourself
as a member of society.

1:05:49.670 --> 1:05:53.050
As people get older, they think,
what am I going to do

1:05:53.050 --> 1:05:56.170
with this money?

1:05:56.170 --> 1:06:00.310
So increasingly, people are
setting up family foundations.

1:06:00.310 --> 1:06:07.760
I learned, that, as of 2006,
there were 36,000 family

1:06:07.760 --> 1:06:10.630
foundations in the United
States, and

1:06:10.630 --> 1:06:11.690
it's growing rapidly.

1:06:11.690 --> 1:06:13.950
There seems to be a trend
toward that, I think,

1:06:13.950 --> 1:06:17.070
reflecting our increasing
affluence, but, I think also,

1:06:17.070 --> 1:06:21.770
reflecting maybe changing
values.

1:06:21.770 --> 1:06:24.440
So, the typical family
foundation is not huge.

1:06:24.440 --> 1:06:27.570
It might be $1 million
or $2 million.

1:06:27.570 --> 1:06:30.840
So, you can set something like
that up, eventually --

1:06:30.836 --> 1:06:32.096
not right now --

1:06:32.100 --> 1:06:34.250
I want you to think
about doing that.

1:06:34.250 --> 1:06:37.760
So, whatever it is you believe
in, you set up a family

1:06:37.760 --> 1:06:41.780
foundation to do that, while
you're still young, and you

1:06:41.779 --> 1:06:44.829
get it going, and it will
then outlive you.

1:06:44.830 --> 1:06:48.100
And you endow it, you give it
enough -- say, you give it a

1:06:48.100 --> 1:06:49.910
couple million dollars.

1:06:49.910 --> 1:06:51.590
That would be a small
family foundation,

1:06:51.590 --> 1:06:53.520
but you can do that.

1:06:53.520 --> 1:06:58.270
And then, there's some named
cause, like it could be

1:06:58.270 --> 1:07:04.610
improving neighborhoods in
our city or the like.

1:07:04.609 --> 1:07:10.799
And family foundations,
I think there's an

1:07:10.800 --> 1:07:13.550
important tax advantage.

1:07:13.550 --> 1:07:15.790
You don't want to think about
this yet, but you should start

1:07:15.790 --> 1:07:17.250
thinking about it.

1:07:17.250 --> 1:07:21.670
When you start making money,
assuming that happens, what do

1:07:21.670 --> 1:07:22.680
you do with it?

1:07:22.680 --> 1:07:25.990
Now, you're pulling in a
million dollars a year.

1:07:25.990 --> 1:07:28.990
That's something that
you might well do.

1:07:28.990 --> 1:07:36.960
And so, I can just put in the
bank and not think about it?

1:07:36.960 --> 1:07:39.910
One problem is, the government
will tax you on it.

1:07:39.910 --> 1:07:43.260
And you get a charitable
deduction from your tax, which

1:07:43.260 --> 1:07:45.810
encourages you to give
to charities.

1:07:45.810 --> 1:07:46.300
All right.

1:07:46.300 --> 1:07:49.870
So, you're now 30 years old,
and you're making a million

1:07:49.870 --> 1:07:51.190
dollars a year.

1:07:51.189 --> 1:07:52.699
And what do I do with
all this money?

1:07:52.700 --> 1:07:53.870
I'm paying taxes on it.

1:07:53.870 --> 1:07:55.650
If I give it away, I
get a tax break.

1:07:55.649 --> 1:07:57.779
So, there's an incentive
to give away.

1:07:57.779 --> 1:07:59.989
You're getting all these phone
calls at night from --

1:07:59.990 --> 1:08:02.030
they found out that
you exist --

1:08:02.029 --> 1:08:06.609
from United Fund or different
charitable organizations.

1:08:06.609 --> 1:08:08.869
But you stopped answering the
phone, because you're annoyed

1:08:08.870 --> 1:08:12.030
by all these phone calls, and
you're thinking, I don't want

1:08:12.029 --> 1:08:13.689
to just give it away to
someone that called

1:08:13.690 --> 1:08:14.570
me up on the phone.

1:08:14.570 --> 1:08:16.390
I want to think about
what I'm --

1:08:16.390 --> 1:08:19.620
I want to do something
for the world.

1:08:19.620 --> 1:08:22.360
The idea is that, while you're
still young, you set up a

1:08:22.360 --> 1:08:25.960
family foundation, and you
give the money to the

1:08:25.960 --> 1:08:28.230
foundation irrevocably.

1:08:28.230 --> 1:08:28.710
All right?

1:08:28.710 --> 1:08:31.910
It has a cause written in its
charter or something.

1:08:31.910 --> 1:08:34.890
And then, you don't have
to spend it now.

1:08:34.890 --> 1:08:37.750
You're too busy thinking about
what you're doing, so you

1:08:37.750 --> 1:08:42.860
start contributing to the family
foundation, and it

1:08:42.860 --> 1:08:44.530
accumulates.

1:08:44.530 --> 1:08:49.150
And meanwhile, you're getting
the tax deduction.

1:08:49.150 --> 1:08:52.700
So, that's why 36,000 families
have done this in the United

1:08:52.700 --> 1:08:55.480
States, and I think it's
growing, again,

1:08:55.480 --> 1:08:56.730
over all the world.

1:09:02.920 --> 1:09:05.700
Sometimes, family foundations
are plans for children, too,

1:09:05.700 --> 1:09:09.970
because your children can
then run the foundation.

1:09:09.970 --> 1:09:13.970
It becomes an ongoing thing
for the family that unites

1:09:13.970 --> 1:09:19.340
them in a cause, as
time goes by.

1:09:19.340 --> 1:09:21.350
I think, this is really
important to recognize this

1:09:21.350 --> 1:09:23.380
channel -- although it's only
36,000, that's still

1:09:23.380 --> 1:09:24.390
a lot of them --

1:09:24.390 --> 1:09:27.960
as we think about the growing
inequality in the United

1:09:27.960 --> 1:09:30.490
States and in other places
around the world, and think

1:09:30.490 --> 1:09:32.610
about the policy toward that.

1:09:32.610 --> 1:09:35.550
I think, we should do something
about inequality,

1:09:35.550 --> 1:09:39.360
but I think encouraging this
kind of a family foundation

1:09:39.360 --> 1:09:42.250
activity is a good cause.

1:09:42.250 --> 1:09:43.950
I wanted to just
think about --

1:09:43.950 --> 1:09:45.890
I'm almost done here --

1:09:45.890 --> 1:09:50.440
there's a recent book by a Wall
Street Journal writer,

1:09:50.440 --> 1:09:52.390
Robert Frank, called
Richistan.

1:09:52.390 --> 1:09:56.970
And he talks about rich people
in America and what they do.

1:09:56.970 --> 1:09:59.260
And the book --

1:09:59.260 --> 1:10:03.590
this is Frank, Robert Frank --

1:10:03.590 --> 1:10:09.120
the book talks about excess
that some people do.

1:10:09.120 --> 1:10:13.180
Some rich people spend money
lavishly, and it disgusts

1:10:13.180 --> 1:10:18.730
people, who think, what is
going on in our society?

1:10:18.730 --> 1:10:21.990
But on the other side of
it, there is also this

1:10:21.990 --> 1:10:27.050
philanthropic trend that
Frank talks about.

1:10:27.050 --> 1:10:28.700
So, I'll give you an example.

1:10:28.700 --> 1:10:31.700
Robert Frank talks, for example,
about Paul Allen.

1:10:31.700 --> 1:10:33.960
Remember him?

1:10:33.960 --> 1:10:36.410
I guess, he was the number
two man at Microsoft.

1:10:39.960 --> 1:10:43.380
So, is he a good person?

1:10:43.380 --> 1:10:47.180
Well, I'll give you two sides to
that story, and this I got

1:10:47.180 --> 1:10:48.340
from Richistan.

1:10:48.340 --> 1:10:53.540
Paul Allen wanted to have the
biggest yacht in the world,

1:10:53.540 --> 1:10:55.930
and so he went to a
yacht company, and

1:10:55.930 --> 1:11:03.850
had a 400-foot yacht.

1:11:03.850 --> 1:11:05.540
It turned out, they said --

1:11:05.540 --> 1:11:08.520
it created problems for him,
because he couldn't dock it at

1:11:08.520 --> 1:11:10.080
any yacht club.

1:11:10.080 --> 1:11:15.190
He had to go to industrial docks
for major cargo ships.

1:11:15.190 --> 1:11:18.730
So, that's a big yacht, and
he called it The Octopus.

1:11:24.520 --> 1:11:27.230
Paul Allen has a new book that
just came out, or it's just

1:11:27.230 --> 1:11:29.460
coming out now, called
Idea Man.

1:11:29.460 --> 1:11:34.550
In his own recount of himself,
he had brutal battles and

1:11:34.550 --> 1:11:36.710
arguments with Bill Gates.

1:11:36.710 --> 1:11:38.770
It was a revealing thing.

1:11:38.770 --> 1:11:41.230
They were really in this
for the money.

1:11:41.230 --> 1:11:44.080
So, he's starting to look
like a bad guy, right?

1:11:44.080 --> 1:11:46.580
Because here he is showing off
with the biggest yacht

1:11:46.582 --> 1:11:47.712
in the world --

1:11:47.710 --> 1:11:49.730
and actually, he's been topped
by somebody else.

1:11:49.730 --> 1:11:51.300
Who was it?

1:11:51.300 --> 1:11:56.660
Larry Ellison got a
450-foot yacht.

1:11:56.660 --> 1:11:59.760
But on the other side
of it is, there is

1:11:59.760 --> 1:12:03.000
something called the --

1:12:03.000 --> 1:12:19.920
it's the Paul G. Allen Family
Foundation, which he has set

1:12:19.920 --> 1:12:20.520
up already.

1:12:20.520 --> 1:12:23.820
And it turns out, he has already
donated over a billion

1:12:23.820 --> 1:12:25.320
dollars through this
foundation and

1:12:25.320 --> 1:12:26.220
otherwise to charity.

1:12:26.220 --> 1:12:28.620
So, that's much bigger than
the 450-foot octopus.

1:12:28.620 --> 1:12:31.320
What does it cost to buy
a 450-foot yacht?

1:12:31.320 --> 1:12:34.020
I don't know, it's
not going to be a

1:12:34.020 --> 1:12:34.920
billion dollars, right?

1:12:34.920 --> 1:12:38.520
This is one of the ironies that
you face in living, that

1:12:38.520 --> 1:12:41.220
someone like Paul Allen, he's
a tough businessman, an

1:12:41.220 --> 1:12:43.320
aggressive guy, he sometimes
does extravagant expenditures,

1:12:43.320 --> 1:12:46.620
but on the other side, there's
this charitable side, so I

1:12:46.620 --> 1:12:49.320
think we have to reserve
judgment about most people.

1:12:49.320 --> 1:12:52.320
Anyway, what he has working
for him is a great

1:12:52.320 --> 1:12:54.120
understanding, apparently, of
financial arrangements, of

1:12:54.120 --> 1:12:57.420
endowments, and he's setting
these up, and you got to give

1:12:57.420 --> 1:13:01.020
him credit for that, and I think
we have to consider that

1:13:01.020 --> 1:13:01.620
as important.

1:13:01.620 --> 1:13:04.320
Institutional investing is an
important trend in our society

1:13:04.320 --> 1:13:07.320
that can and does work for
important and good purposes.

1:13:07.320 --> 1:13:09.770
I'll see you on Wednesday.