Michael Steinhardt is not a value investor, but I thought it would be very interesting to here his views on the financial crisis. Steinhardt founded Steinhardt, Fine, Berkowitz & Co. in 1967, when hedge funds were far less common than they are today. Steinhardt Partners achieved 24% per annum returns –over a 28-year period. Steinhardt’s strategy consisted of investing in equity, bonds, options, and currencies. He achieved his results through a mixture of trading and long term investing.
Steinhardt retired in 1995. In 2004 he joined WisdomTree and helped it achieve the phenmenoal success it is today with over $13 billion aum. Currently, Steinhardt is Chairman of the Board of Israel Energy Initiatives Ltd (IEI), a unit of IDT corporation. Steinhardt authored a book titled, No Bull: My Life In and Out of Markets.
Michael Steinhardt was asked to testify before The Financial Crisis Inquiry Commission. The Financial Crisis Inquiry Commission (FCIC) was a ten-member commission appointed by the United States government with the goal of investigating the causes of the financial crisis of 2007–2010. Michal Steinhardt, with his decades of experience in the financial industry was asked to testify before the Commission.
I have transcribed Michael Steinhardt’s testimony before the commission below. For reader’s pleasure I have put the document in scribd, and text format.
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10/04/2010 FCIC staff audiotape of interview with Michael Steinhardt, Steinhardt Management
Gary Cohen: A gloomy afternoon, beginning of fall. And with me are Jamie Sacron [Phonetic] and Donna Norman from the Financial Crisis Inquiry Commission. This is Gary Cohen and we are interviewing Michael Steinhardt in his office on Madison Avenue. Mr. Steinhardt, is it okay if we tape your interview?
Michael Steinhardt: Yes.
Gary Cohen: Very good. So, we – the Commission is charged with trying to figure out why and how the financial crisis occurred, write a report, deliver it to the President and the Congress on December 15th and hopefully what we present to the American public will help shape the regulations that are going to be in the Dodd-Frank Bill and perhaps give lessons which maybe it will be 70 years before the next financial crisis rather than just – rather than the period of time that we had.
So, we’d like to ask you some questions. What do you think actually was the crisis? Which part of it was where the crisis came into focus and the system started to fall apart?
Michael Steinhardt: Sometimes I think if you grow too old and you get a little too balanced then you no longer even willing to answer serious questions like that in not only one sentence but one paragraph because it’s complicated to answer it properly. It’s very complicated. I mean to say for instance that Greenspan who for most of his period as head of the Federal Reserve was a near demigod. He was extraordinarily well-respected. I think that’s a fair statement and that was odd. But then he was and I remember, he used to come here before he became Chairman of the Fed, he was a paid hand in [0:02:32] [Indiscernible] and he would come here once every quarter because [Indiscernible] paid for people like him and other economists to visit their clients and I was one of their clients. And he was one of many that would come and I – the impression that I only have – an impression of him was that he – and that’s the expression I would use about him for decades now and he wasn’t so interesting because all he did was extrapolate the obvious and that was the expression I used then and that’s the expression I would use now of something going like this.
You could invariably rely upon him to say we continue to go in that same trajectory like this. We continue to go. And he was just plain boring. I found him to be a really uninteresting guy as someone from whom you might learn something. And therefore, when the crisis came and he had that wonderful expression that I don’t remember what it was now but you’ll remember what it was about something exuberance and stuff like that.
Gary Cohen: Irrational exuberance.
Michael Steinhardt: So, he was a guy who was a demigod for all that time who used terms like irrational exuberance and who allowed some sense and courage, the extraordinary excesses of the period. It was like the Pope blessing things going on in World War II. [0:05:00] That’s a terrible analogy but in some sense, I don’t think it’s terribly unfair analogy because you depend on certain people as your moral police. That’s what he was. And he didn’t act appropriately. In retrospect I think, he would acknowledge that.
Now, was that, going back to your question, a major reason for the tobacco? I’m not sure. I’m sorry.
Gary Cohen: Go ahead.
Michael Steinhardt: No, go ahead.
Gary Cohen: I was asking you actually a more – a narrow question which is when do you think the sub-prime problems which came evident in 2006 and 2007 really converted themselves into full blown great recession and narrowly avoiding another depression? Do you have a sense of when that moment tipped?
Michael Steinhardt: No, I don’t. I don’t for I’m the wrong person unfortunately to really be as sensitive as I might have been at other points because I wasn’t so involved. I mean you should know a little bit about my history. I stopped managing other people’s money in 1995 and from 1995 through today, I have 80 or 90% of my efforts to Jewish future. And that’s where I spend my time and I should be able to say I still have that machine and I still have this occupational hazard to take a look more often than not. But it’s not quite the same so I don’t have a great answer to that question as to the ingredients that led to excesses becoming so clear that they created the market tobacco that they did. Is that an answer to your question?
Gary Cohen: Yes.
Michael Steinhardt: Okay. Sorry.
Gary Cohen: When you were actively trading, would you say the market was more of an equity market? Because it seemed to me that this crisis was a debt crisis.
Michael Steinhardt: When I was active in the market, when I started in the ‘60s, in the ‘70s, some of the works that are common place words today didn’t exist. I mean one can’t but acknowledge and one should acknowledge the extraordinary technological innovations that have occurred in the last, 20, 30, 40 years in the financial world. And I don’t think they’re given enough credit. Phraseology, even basic phraseology like private equity, I’m not sure existed in the ‘60s. All sorts of things that are obvious and things that are fairly comfortable in the jargon even for the average investor were not at all used in the ‘60s, in the ‘70s into the ‘80s.
So, there’s been an extraordinary shift. Part of that shift has been from equities to a lot of other things you write. But it’s been much deeper than that. But it has been, you know, Merrill Lynch used to have a symbol, it has a ball and stuff like that and they used to say, investigate before you invest and the market is key to an individual investor who – and they used to have things about Mr. Jones is about to buy a 100 shares of General Motors [0:09:13] [Indiscernible] and Mr. Smith is thinking about selling a 100 shares of General Motors in Portland Maine and the process by which that happens on the New York Stock Exchange. And that’s what the stock market was.
And there was no television program about stocks. There was a fraction of the coverage. And sometimes, I kiddingly say today, that is a remarkable experience about up and dead role about what I’m about to say. I used to say that the market can’t help but be vulnerable to the light of the fact that 93.8% of the Jewish college graduates [0:10:00] that I now posing that want to go into financial services, it might be 93.2% but you get the point.
When I went into [Indiscernible] in 1960, it was an insignificant number. People then wanted to go to Eastman Kodak, and Triple M [Phonetic] and IBM and companies like that. And Wall Street was a dreaded, ugly, conservative, careful, uninteresting place. But how many – but the percentage of young people today wanted to go into financial services dwarfs. This is the second most popular occupation. And the compensation on Wall Street particularly in money management and particularly in performance money management dwarfs. The next five leading occupations combined come close.
So, you have to, in order to understand your question in broad terms, understand the change in environment that’s occurred where there is this extraordinary growth in interest, in money-making, in opportunity in this world. So, it’s not that that the crisis is only a phenomenon of the sorts of things that you’re likely to talk about. The crisis is a crisis or the fact that there’s been this enormous change in markets, globalization. When did the term globalization become a popular term? ‘80s, in the ‘90s? I’m not sure.
But I used to say, I wouldn’t invest in stocks of foreign countries unless I know the area code. People don’t think about the area code very much unless in Kuala Lumpur because they hear something about Kuala Lumpur. Can you invest if it weren’t Kuala Lumpur is on the map? I’m not sure I can. But there’s a market for ETFs in Kuala Lumpur. I mean the world has really changed and this has created this new environment. And this new environment is part and parcel of the broad phenomenon that is our – that is our financial world today.
Now, when you see Goldman Sachs on a stand trying to explain why they did these trades with [0:12:41] [Indiscernible], well, a whole new world, a whole new world. Those trades would not have been possible 20 years ago. Those securities would not have existed 15 years ago. So, when you talk about this, you have to put it in that context in order to explain it. And if you don’t put it in that context, you’re missing the point. Do you disagree?
Gary Cohen: Certainly, there have been a huge amount of enormous change even in the time that I’ve been aware of it which is not quite as long but I guess close. So, my take is that you think it’s been a good thing or is it a bad thing? And you think …
Michael Steinhardt: I wouldn’t even – I wouldn’t even try to answer it in those terms because I’m not sure that’s even relevant. It’s happened as part and parcel of this great growth that occurs in an uncontrolled way because of technology, because of opportunity, because this is – I can’t use the word capitalist to explain all but to where the opportunities are in a relatively free Western society. And they seem to still be where the opportunities are.
What’s the probability of your kids going into some company that produces what we used to call widgets? You know the phrase widgets? I mean you were in school. Didn’t they use the term widgets? No one produces widgets anymore. You know widget is? As we known [0:14:30] [Indiscernible]. I know that widget was something produced on a mass basis and that’s what people do when they grow up. They produced things like widgets.
But now, they do things on – up here on those machines. But I don’t know if it will ever be the point but the point is that all well-mean number, the best and the brightest today and the not so best and the not so brightest are attracted to financial services. [0:15:00] And they’re attracted to financial services because that’s where the money is.
I was one of the first ones to start a hedge fund. And why did I start a hedge fund? Because I can start one at the age 26 in a rather stead Wall Street environment where I could, because I was very brave, I was very bright, and I thought I could figure out stocks and markets better than people not twice my age. And that where else could I – a Jewish boy from Brooklyn, have my own business, be my own boss benefit or suffer based upon my own performance, my own achievement. Then that’s what it was. But that’s – it has been distorted because when I did it, and for most of my career and this is an important point or at least it was for me, I lived most of my career with very high anxiety because I felt that for me to do what I did, I had to be the best money-manager in America. And no one was going to pay me 20% of the profits plus 1% of the assets unless I was really the best. And I’m not exactly be the best every year but how to make money every year of market down and the market didn’t – I had all the tools and I have to be right up there.
And for my 29 years, I compounded gross at 30% and net to my investors between 24% and 25%. And do something like that, to justify what you were being paid. Think about the hedge funds today. Think about what they return. Think about all these guys is in? Well, we were 3% or 4% better than the T-bill rate. [0:17:04] [Indiscernible] but the fees haven’t gone down. The pay even had gone up.
So, what does that mean? What’s happened in the last 30 years? What does this suggest about the business? What does this suggest about the question you’re asking? It suggests that the world has really changed. The Wall Street was extraordinarily free-wheeling. That any sense of control, of morality, a sense that there were standard rules were really vague, outdated, and hardly bore upon the people who were the dominant people in this business. And that’s what I think really has happened.
Gary Cohen: When do you think that started to accelerate if indeed did or …
Michael Steinhardt: ‘80s.
Gary Cohen: In the ‘80s?
Michael Steinhardt: ‘80s and particularly the ‘90s. But as far as accelerate, I’d say the ‘80s.
Gary Cohen: Were there any events that …
Michael Steinhardt: it was the fact that the amounts of money made relative to almost any other profession were just mind-boggling. There other things too.
Gary Cohen: I remember the year that Mike Milken made $400 million. It was a lot of money, still a lot of money.
Michael Steinhardt: Sure.
Gary Cohen: Although it’s less than it was. I remember his kid brother made a $100 million because he was his kid brother. And that was the first time I think that people really started paying attention to what that industry was capable of producing.
Michael Steinhardt: And Mike Milken again, he was the hedge fund but for good or for bad, and there too is it good or for bad. I don’t particularly think that much of him but he was innovative. What did he do? He took low rate bonds and made them into securities that had markets that were not pure unadulterated crap. That went up and went down but you could sell them at any time under almost any circumstance and that was a whole different sense that existed before. And I think it’s – he provided a service in the same way that people who have created markets for all this other stuff that exist today of the markets for things that were unimaginable as markets have provided a service.
So, when you asked the question as you did earlier on, is this stuff more of a good or bad? It’s really hard to answer [0:20:00] because some people would say it’s been good. They really made markets in areas that didn’t exist before. Is it a virtue? People – has the average investor benefited from all these new markets? Has the average investor done well in the last 10, 20, 30 years? My inclination is no. my inclination is that the average investor has not done well. My inclination is the average investor has gotten screwed on balance. That if you look for instance and this is minor, the real cause of the mutual fund industry is egregious is a joke. And the reason ETFs are doing well is because mutual funds are a shanda. Asked them to explain to you what a shanda is.
Donna Norman: Shameful.
Michael Steinhardt: Thank you. A shanda. The mutual funds are a shanda. That’s what they are in terms of how they charge, hidden charges, all that sort of stuff. But that’s been the way of the world. They’re not going to change it. I’m not going to change it. But mutual funds are charitable? Disgusting. And did they really provide a service? Well, if you define service very broadly but for all those people who are carrying around mutual funds and picking stocks and people who are very serious even with companies, how come they all underperformed in the [0:21:28] [Indiscernible]? Most of them underperformed in the average. How come we all stink? I have a serious question. What are the answers to these questions?
So here you are trying to answer a rather honest, narrow, confined question but I don’t think you can do it without thinking about the sort of things I just focused upon. I don’t think so. Even though I guess you got to answer the question that you were asked to answer.
Donna Norman: Looking at historical forces that occurred and accelerated, that occurred over the past several decades affiliate in this quite [0:22:20] [Indiscernible].
Michael Steinhardt: So, what do you disagree with? You met many people I assume by this point.
Gary Cohen: Yes.
Michael Steinhardt: Okay. Is my view an out layer view, a general view? Is it – people concentrated more on the immediacy.
Gary Cohen: It’s interesting. We spoke with Arthur Levitt a couple of days ago, he’s not that far off of where you are. He was in the trenches for quite a bit of that time. And we met with Sandy Weill [Phonetic] this morning and he wasn’t quite in the same direction. [Laughs]
Michael Steinhardt: The last time I saw Sandy Weill is at Christian high school at a party. I don’t like Sandy Weill too much.
Gary Cohen: You get to a certain stage I guess that you could say whatever you want.
Michael Steinhardt: Who’s going to listen to him? In any case, I always [0:23:23] [Indiscernible] at a party, Arthur, Carter [Indiscernible], and I see him there. And I asked him same question you were asking me. I say, “Sandy, what do you think the cause of this great market tobacco was?” Then he looks at me and he must have been asked the question. I say, “Sandy …,” I asked him again, “what do you think? When this is all said and done, what will be the – when the history books are written, what will they say?” And someone from the back yells out, “I think it was Greenspan.” Funny. “I think it was Greenspan.” He really was screwed up. And I said, “You can’t quote Greenspan.” I say because he wasn’t pernicious. He didn’t get rich from it. You can’t blame it on Greenspan, I say. And I go back to Sandy Walt. And I say, “Sandy, what do you think the reason to this was?” And finally – and then at the same party is Barbara Walters, she turns and looks at me, she’s sitting next to me and she says, “Michael, you imp. Why do you keep doing that?” [Indiscernible], [0:25:00] I’d like you to know, if only think I take her one was I picked the wrong successor. And that was the end of the conversation. So, I don’t know if that was insightful to you in anyway but when you mentioned him.
Gary Cohen: But he’s very circumspect this morning.
Donna Norman: What answer were you hoping for?
Michael Steinhardt: Well, I was hoping to provoke him. He made so much money and kept it and had that disgusting Jewish smile on his face which I never – I just never liked the guy. I mean I just don’t like him. I don’t know why. But the truth is in fairness to him, people who knew him from Citibank say he really did a pretty good job. He left while things were sort of intact. So I don’t know. But I just didn’t like him. I didn’t like the style and the pomposity and the way he put his name on everything that philanthropically that he ever did and just wasn’t my – I don’t know. I shouldn’t talk this way, right?
Gary Cohen: You can talk any way you want.
Michael Steinhardt: [0:26:20] [Indiscernible], do you know what that means?
Gary Cohen: Excuse me?
Donna Norman: [Indiscernible].
Michael Steinhardt: Thank you. Okay. Let’s move on.
Donna Norman: Putting bad words that can then not be contained.
Gary Cohen: Yes, I do know. It’s one of the greatest ever since. So, an idle tongue or a – the – go ahead.
Donna Norman: To be devil’s advocate …
Michael Steinhardt: You may.
Donna Norman: One of the reasons perhaps, just agree or disagree that compensation increased dramatically on Wall Street was that there were these really smart hedge fund guys who however much the folks on Wall Street were making were earning multiple stocks.
Michael Steinhardt: Right, correct. I don’t think it’s devil’s advocate. It’s true. It’s true. I mean when I thought about – I was – I didn’t know that much about hedge funds when I started my own. I was asked by Howard Berkowitz to pick him as partner and he explained to me what a hedge fund was. I really didn’t know at the time. I was a little pro and he’s been doing really well as thousands of brokers have at the time as an analyst. And he called me about a hedge fund and oddly for me at least, I didn’t much care about the money. I didn’t care about the money. What I cared about was what I did. I don’t care about my background. Did you read anything about my background?
Donna Norman: I did but maybe I didn’t go far enough.
Michael Steinhardt: Okay. I grow up in [0:28:13] [Indiscernible] where stocks were like Swahili. They were very, very remote from the world of lower middle class people. And my mother and father were divorced when I was a baby and my father wasn’t around very much. And when he came to my Bar Mitzvah, he showed up and he was a perpetual gambler. And he was being arrested in floating crack games and purposeless things. And he apparently have been gambling with some stock broker from R.J. Reynolds Company and the guy coned him into buying a 100 shares of two different stocks. And at my Bar Mitzvah, he gave me these 100 shares of these two stocks, [Indiscernible] Cement and Columbia Gas. He said, “Here, here’s your Bar Mitzvah presents.” And the money of those two stocks was $5,300 which in 1953 was like the end of the world.
Gary Cohen: You can buy a house with it.
Michael Steinhardt: Whoever heard of $5,300? And that changed my life. And from that point on, at the age of 13, forever, I was just so interested in the stock market. The only and the idea of buying and selling stocks being right, that was my total interest. I wasn’t interested in building an estate. I wasn’t interested in [0:29:50] [Indiscernible]. I was just interested in being a stock broker. That’s what I was interested from then until I stopped.
So [0:30:00] – and I wasn’t interested in making – in the money I made either. I really never even knew at the end of each year. I don’t have a guess as to how much money I make because then all I care is about the performance. And that was my life.
So yes, I made a great deal of money as did others. But it wasn’t – I was just so committed to being the best and I’m not sure as time went on, other people were more sensible than I was and they interested in the fact to make so much money. And then it really grew and it became the most exciting profession in the world. Hedge funds, private equity, I mean the whole gamut of performance money management. But it’s that mentality where the money managers really dominated. The brokers dominated the financial scene. And their own gizmos, their own product, have you ever heard the term products?
Merrill Lynch just introduced three new products related to markets and mortgages and God knows what else these were, is my language. A whole new products. We’re not seeing these products in the ‘70s and ‘80s , in the ‘60s, in the ‘70s and in the ‘80s. You don’t hear about products. Those are products. Product was something new, devised by some wise guy on the Wall Street to give you a new way to speculate.
Gary Cohen: When you were running your fund, did you leave most of your assets in the fund?
Michael Steinhardt: Yes.
Gary Cohen: That’s somewhat of a difference that in terms of getting the game has been used a lot in the US a couple of years because of the whole ability to package mortgages and sell them off to investors and not have any consequences.
Michael Steinhardt: Yes, it really changed from the early part. The early part, it was really a matter of pride. I had one really bad year, 1994, when I just screwed up. And I was horrifically depressed. I can’t get out of bed because it was so much part of me. I never separate myself from my performance. That was not the case after a point with most people who got into the business. They did it for the money.
Now, if I’m sounding self-serving in how I describe myself, I don’t quite mean to be but what I do mean to say is that there was this great shift that went one from the early phase – stages of performance money management. Plus then, it was really rare. I mean why should you get 20% of someone else’s profits and then charge 1% of the assets as well when the average mutual fund was charging half of 1%, a three quarter percent of the assets and that’s all? What were you doing to justify that difference? You had to be a genius. You have to do so much better to justify but that’s what it was.
But then they extrapolate that to all the other stuff that was going on, all that mortgage, all that other stuff and you get to the climate that existed in the ‘80s, ‘90s, blah, blah, blah, blah, blah.
Gary Cohen: Do you think the change you see in the investment banks, where would you much go from partnerships to probably trading corporations, did you notice any difference in the way they serve their clients, the way they acted?
Michael Steinhardt: Of course, Goldman Sachs was once a client-oriented business. It’s no longer a client-oriented business. I mean word, proprietary trading that comes and dominates those people, doing things for one’s own account dominates what they do. It did not dominate what they did for the most of their history.
Gary Cohen: And do you think that’s because they went to a corporate form or …
Michael Steinhardt: I don’t know how to answer that question. Form doesn’t matter. I think what matters is that [0:34:41] [Indiscernible] run the business wanted to run the business in such a way as to take best advantage of their opportunities. They think it was best done through some form. Form doesn’t matter. But the guys – the partners of Goldman Sachs wanted to make the most money they could.
Gary Cohen: [0:35:00] Well, that part hasn’t changed.
Michael Steinhardt: Yes, but what form they used.
Gary Cohen: But another question I was asking is whether or not if they had so much more of their capital invested?
Michael Steinhardt: For most of the years that I was – not that I was very close to Goldman Sachs as a firm, they were required to reinvest almost all their money, maybe they still are. I don’t know. But Goldman was really different from most of the other firms. They were required to reinvest their money and there was a partnership and they were the best firm around for that reason if not others, long before they went public and all that sort of stuff. They were the best firm there was.
Gary Cohen: You had mentioned Greenspan, do you think that there should have been more regulation in the financial community? You sound very jaundiced about how cool financial innovation there had been in the last 30 years.
Michael Steinhardt: I don’t mean to sound so much jaundice. What I mean to say is several things that number one, the idea that one can have financial regulation that is truly fair is an idyllic concept. It’s an idyllic concept. And I don’t know what exactly to do about that but it’s just not possible on this earth. And the more complicated things become the more idyllic and more remote, fairness in financial regulation somehow becomes I believe. So I deal with that – I don’t know. But what bothers me is not the fact that financial regulation doesn’t and hasn’t succeeded is the pretense, pretense on the part of – who took the blame at the SEC for their great failures? And they had serious failures there but it was as if no one was around to say, we really screwed up fellows or who hasn’t? It was – they were dealing with a world where success and failure was measured in a bottom line. They were regulating financial industry but their own success or failure had no such measurement. And that contrast was really uncomfortable I think for a fair number of people. Do you understand what I just said? No?
Donna Norman: I’m not sure.
Michael Steinhardt: Well, if a Wall Street firm failed or if a Wall Street firm did something that it shouldn’t have and was forced to pay a large fine or fire a lot of people, it was fair – some of it was fairly obvious who were people got fired. They were immediate obvious remedies.
Donna Norman: I think that all of our division head at the SEC were swamped out I think. The broom was wise but …
Michael Steinhardt: Is that what happened?
Donna Norman: I don’t know.
Michael Steinhardt: Well, if that’s what happened then I’m wrong. All the division heads were changed?
Donna Norman: It happened, yes. It happened.
Michael Steinhardt: For what period of time?
Donna Norman: About a year.
Michael Steinhardt: Really? That hasn’t been widely enough acknowledged. And who was head of the SEC at that time? Cox?
Gary Cohen: Yes.
Donna Norman: Cox. And then trading market has swamped out and then unfortunately I don’t see why it changes.
Michael Steinhardt: Okay. But wasn’t Cox there three, four, five years ago?
Donna Norman: Yes, he was there [Indiscernible].
Michael Steinhardt: I don’t know. I just didn’t sense it. You may be right. [0:40:00] That there was the same sense of reward or certainly punishment there. I may be wrong.
Donna Norman: What would you want to se?
Michael Steinhardt: I would have wanted there to have been some fairly decisive conclusions drawn about the performance of those people and that’s what I wanted to see. You think I’m wrong? You disagree?
Donna Norman: I think you’re wrong. [laughs] We’re reluctant to state our views because that’s not our turf.
Michael Steinhardt: All right.
Donna Norman: We just [0:41:00] [Indiscernible].
Michael Steinhardt: Okay. Now, I’m speaking totally comfortably and without constraint.
Donna Norman: I don’t think you could be wrong about your opinions.
Michael Steinhardt: Okay. I just felt going back to the statement I made a long time ago that I didn’t get a sense, and you will remember this statement, in this period of time that right and wrong are appropriately dealt with. Remember when John was still here, I think I said in a slightly different terms that the bad guys didn’t get punished. And I just didn’t feel that this period led to – I mean the guy who ran Lehman Brothers was a third rate [0:42:01] [Indiscernible]. He was a salesman who grew through the ranks and he just wasn’t quality person in my view. Just wasn’t. And what’s going to happen to him? Nothing. Thousands of people have disappeared. Thousands of people have lost their life savings. And now, he’s happily testifying and blaming whoever he blames and life is going on. No one was going to jail. No one is really being accused of illegal acts. Were there no illegal acts here?
Donna Norman: What’s your view?
Michael Steinhardt: I’m not close enough to really know specifically but there were illegal acts that are – acts that can be prosecuted. My strong intuition is that there were. That this was a debacle. That this was a terrible experience for America. And yet, who is – you can’t say, you guys are having a commission and you’re trying to find out what happened. Where were the evil doers? Was there no evil?
Donna Norman: This is an interesting question.
Gary Cohen: And it’s one that I guess a number of people who sat on their desk, was the crisis a failure of men or was it a failure of a system? And if it was a failure of men, then you get better men and women. But if it was a failure of a system then there’s something fundamentally flawed in the system. And people have different views of that.
Michael Steinhardt: I don’t think you can so comfortably [0:44:29] [Indiscernible] between men and the system. If you’re a running leader for a number of years, you have enormous discretion. You can use x amount of leverage, y amount of leverage, z amount of leverage. You can say all sorts of things publicly that very few people [0:45:00] are going to really understand in discussing your financial circumstance. You can do all sorts of things that create more cloud than clarity. And it’s very difficult with the complexity of the system that existed then and exists today for the average prosecutor or the average informed individual to really understand exactly what went on particularly a few years or more than a few years afterwards.
And basically I think for those reasons there’s been very few criminal prosecutions. But I think there were many, many by my standards, criminal acts. If you can understand that distinction, may be I’m wrong.
Donna Norman: Do you have a view about the relationship between the Wall Street firms or the investment banks and the commercial banks and the regulators are more that the relationship, for example, say I’m more a New York [0:46:22] [Indiscernible].
Michael Steinhardt: I mean certain other things were again, used word that you weren’t supposed to understand. Shanda was something deeply wrong with the rating systems. Are those with the system, is there some criminality there? I don’t really know. There is something terrible there. You have to be deaf, dumb, and blind to have rated some of those securities the way they were rated. You couldn’t be a serious person working at Moody’s or at [0:46:58] [Indiscernible] or the other few rating systems and rate those securities as you did. You couldn’t be. Is that criminal? Was it negligence? What was it? No one was going to jail for that.
Now, I’m not smart enough and wasn’t close enough to know the intimate details but it’s impossible to someone at those firms who have just blown it. Impossible. So, are there other examples like that? I think so. I mean the idea that the well-publicized Goldman [0:47:43] [Indiscernible] trade and there must have been hundreds examples like that. Is there something immoral about that? My guess is yes. But who’s going to be solemonic [Phonetic] enough to understand what’s criminal and what’s not criminal there? Who’s going to be?
Donna Norman: I didn’t know it was a funny book. These are good points.
Gary Cohen: That really then raises the issue of what would have been – if you can’t rely on a Dick Fuld or a Jamie Dimon or [laughs] I’d take your comments, to run their businesses because occasionally someone will rise to the top and maybe underperformed. How does a system account or deal with for building redundancy? I don’t know whether …
Michael Steinhardt: Those are really good questions, which goes to the heart in some sense of a system, a broad system where we really allowed going back again, this broad question, the technology and the individual opportunity to just run wild. Nothing wrong with that I guess. And you might say, well, what did Dick Fawn really do wrong? He just played the game a little too vigorously. He had just a little bit too much leverage? He just didn’t know when enough was enough? I mean is that the way to look at it? May be it is, I don’t know. By historic [0:50:00] standards, if you compare the Lehman’s balance sheet and the Lehman’s ratios with Lehman ratios 10 or 20 or 30 or 50 years ago, these ratios then were absurd. But may be that’s unfair to compare it with their financial ratios 10 or 20 or 30 or 50 years ago because the world had changed. I don’t know.
And who am I or you or anybody to say that the world hadn’t changed and they were really right? And who was the authority that was looking over their shoulder and saying, the fact that you got x to 1 cash or xx to 1 cash, is it right? I don’t know.
Donna Norman: Why did investors allow it too?
Michael Steinhardt: Which investors? Investors of Lehman?
Donna Norman: Yes.
Michael Steinhardt: Well, that’s a good question too.
Gary Cohen: And the lenders to Lehman should have been [0:51:04] [Indiscernible].
Michael Steinhardt: They were in the same game mostly. But some did and some were sensitive but again, some of them were in the same – they were getting rich in the same way Lehman Brothers getting rich. Most of them, if they were on the opposite side, but this was a circumstance where the commercial banks, the investment banks and they were all part and parcel of one system. And look what happened to the banks, commercial banks. And everybody got best of the – there were no heroes in that sense. And who suffered in the end?
Gary Cohen: Well, the popular message that the financial community has come out okay and the rest of the country is still sweeping up.
Michael Steinhardt: Is there something to that myth?
Gary Cohen: There’s a fair amount of truth to it. Let’s look at the 2009 profits, they were [0:52:20] [Indiscernible].
Michael Steinhardt: I think it’s astonishing. I think so too. Coming back to my original statement, there is something that doesn’t seem right about this. Corporate America is rolling dough and the number of people they employ is considerably fewer. Their margins are fantastic. They’re really doing well including Wall Street. Wall Street doesn’t stand out the way they used to but it’s a strange time. The Liberals [0:52:57] [Phonetic] have not exactly shown of what I have to show for a higher government expenditures and all sorts of things which doesn’t seem to work. It’s a strange time.
The average investor hasn’t done well. Instead of creeping back into the stock market a little bit as the market makes new highs. I don’t know. It doesn’t seem anybody is. There doesn’t seem to be fairness in the system. But I bet you, if there were good to consumer surveys made about the system and optimism and pessimism, it wouldn’t show too well for America at this point.
Donna Norman: When you talk about fairness, you say that it’s idyllic and you make a point that …
Michael Steinhardt: Ideas were idyllic to describe financial regulation, yes.
Donna Norman: And you seem to be saying that fairness isn’t in the [0:54:01] [Indiscernible] now or in the future. What is the fundamental that makes that not as achievable?
Michael Steinhardt: To spread information, to spread knowledge or also some desperate phenomena that will invariably give some people great advantage over others and that financial regulation can only touch upon a meliorating some of those elements of desperateness. And probably that’s not strong enough answer but I think it’s one of the answers. Agree, disagree? What do you think?
Gary Cohen: Differences in information have always been a problem. Even the best with the SEC is supposed to be about. That’s when a lot of the regulations with that [Indiscernible].
Michael Steinhardt: Yes. In essence, it can’t be [0:55:00] about that. It can’t make Mrs. Jones as knowledgeable as some corporate treasurer who has a relative. I mean it’s just too much difference in quality of information is just inherent.
Donna Norman: You previously said that the system run wild or money-making run wild.
Michael Steinhardt: I think so.
Donna Norman: So, is it the regulators to end the running wild or is it for more moral humans?
Michael Steinhardt: Well, that’s a great question. That’s a great question.
Donna Norman: Or is it for more insightful investors?
Michael Steinhardt: That’s a great question. When I used to – like I don’t want to keep picking on him, I don’t mean to be. When I saw an article, it was the front page article in the – front page headline in the Post and the title was, Pigs Lie. And it was – you saw it?
Donna Norman: [0:56:17] [Indiscernible].
Michael Steinhardt: Exactly. Is there something wrong with that? I see nothing wrong with that. He hadn’t worked there for five or six years. And the deal was that he would have free airplane availability for whatever he wanted for his family for the rest of his life. Do you have free airline availability for the rest of your life for anything?
[Laughter]
Gary Cohen: That would be very nice.
Michael Steinhardt: Do you? Then why is he such a super human being to have that? Is it fair? I don’t know. It doesn’t seem to me. Give me a fast deal. Maybe that’s part of our system. I don’t think its right. Do you?
Jamie Sacron: We’re not supposed to answer these questions.
[Laughter]
Michael Steinhardt: You have three more minutes then I got to go.
Donna Norman: Back to Federal Reserve and its relationship with Wall Street, comments on that.
Michael Steinhardt: Well …
Donna Norman: I guess about Dick Fuld, about Sandy Weill, both at certain times had seats on their board.
Michael Steinhardt: Well I think the Federal Reserve has many at least to keep itself in its peculiar academic dress above question in terms of integrity to which I give it credit. For a long time and during the Greenspan era and before and maybe even now, there was and is this hanging on every word [0:58:20] [Indiscernible] with that says that conditions continue moderate however there is a slight movement toward greater [Indiscernible]. I mean because it seemed too important because you sensed that whoever was writing that thing has such capture, has such command of the English language that whatever he was writing really has such great understanding of the nuance of the economy. That those words captured all the nuances that the most intelligent, wise, knowledgeable people had.
And therefore, those statements were just focused like nothing else. It wasn’t true, isn’t true, won’t be true, blah, blah, blah, blah, blah. But the fact that they were given such focus is a suggestion that they maintain their integrity. It’s a plus. Beyond that, I mean my feeling is number one, of course, they’re mere mortals. Number two, with this guy who was in there now, I think they just got a little bit market followers. They don’t mean that much to me but that doesn’t matter. You can have people doing it and they’re doing their best.
I don’t have much else to say about that. I don’t have much else to say about that. I think he’s crazy keeping interest rates as low as he is but at some point, [1:00:00] he’s going to have to do something different and he’s going to have to do something that’s going to deal with this artificiality. And I think if there’s any problem I see with present policy and in a certain sense with policy over this period and with America in general, it’s a feeling that no one is prepared to withstand pain. And that’s a relatively new thing in America. No is prepared to say, “My fellow citizens, we’re about to go into a difficult period and it’s going to be hard for all of us and we’ve got to swallow deep and suffer a few years of lousy economics and high unemployment. And we’re all going to be in it together and we’re going to do out best to get out of it.”
There never stuff like that. Always avoiding pain rather than acknowledge it. At certain times and certain ways, pain is necessary. And I think by his – by that – if he was doing that with interest rates and other things like that, that’s what they’re doing. They can’t accept the fact that sometimes you got to have pain. And pain isn’t the worst thing in the world as long as it’s justified in the long run.
So I think keeping interface at these levels, which really screws some people who are in the least position, least able position to deal with it, pensioners and other people who depend on interest rates. You got to be crazy. You got to be crazy to make the whole world dependent on the whim of some schmucky academic from Dillon, South Carolina or wherever Bernanke is from. I think that’s crazy.
Gary Cohen: Princeton.
Michael Steinhardt: Princeton, big deal. Yes, so what? That’s my view. I don’t think they should do that. I think they should be more prepared to say, listen, we’re going through a difficult period. We’ve got interest rates down a great deal. And that’s about all we can do in that respect. And I’d like to go a little bit longer, a little bit less lower, we can’t. That was what he can’t tell. But we’re not going to do things that’s so artificial. There is much artificiality on the other side. And they don’t know that. They’re so focused on the immediate. They’re so focused on the next month’s statistics. And that is a big mistake. I would say, there’s one mistake about that policy, this is extraordinary [1:02:42] [Indiscernible] never acknowledged it. This is extraordinary focused on the immediate of the next month and the next two months or the short-term. That’s a big mistake.
Jamie Sacron: Chairman Michael has spoken.
Gary Cohen: Is there anything – I think yes, it’s pretty close to 4, is there anything that we haven’t asked you that you wished we had?
Michael Steinhardt: No, no. I’m sorry if I’ve been too broad but when you get to be my age, I’m just considerably older than you, you tend to be a little bit broad in your comments.
[1:03:20] [End of audio]
10/04/2010 FCIC staff audiotape of interview with Michael Steinhardt, Steinhardt Management
Gary Cohen: A gloomy afternoon, beginning of fall. And with me are Jamie Sacron [Phonetic] and Donna Norman from the Financial Crisis Inquiry Commission. This is Gary Cohen and we are interviewing Michael Steinhardt in his office on Madison Avenue. Mr. Steinhardt, is it okay if we tape your interview?
Michael Steinhardt: Yes.
Gary Cohen: Very good. So, we – the Commission is charged with trying to figure out why and how the financial crisis occurred, write a report, deliver it to the President and the Congress on December 15th and hopefully what we present to the American public will help shape the regulations that are going to be in the Dodd-Frank Bill and perhaps give lessons which maybe it will be 70 years before the next financial crisis rather than just – rather than the period of time that we had.
So, we’d like to ask you some questions. What do you think actually was the crisis? Which part of it was where the crisis came into focus and the system started to fall apart?
Michael Steinhardt: Sometimes I think if you grow too old and you get a little too balanced then you no longer even willing to answer serious questions like that in not only one sentence but one paragraph because it’s complicated to answer it properly. It’s very complicated. I mean to say for instance that Greenspan who for most of his period as head of the Federal Reserve was a near demigod. He was extraordinarily well-respected. I think that’s a fair statement and that was odd. But then he was and I remember, he used to come here before he became Chairman of the Fed, he was a paid hand in [0:02:32] [Indiscernible] and he would come here once every quarter because [Indiscernible] paid for people like him and other economists to visit their clients and I was one of their clients. And he was one of many that would come and I – the impression that I only have – an impression of him was that he – and that’s the expression I would use about him for decades now and he wasn’t so interesting because all he did was extrapolate the obvious and that was the expression I used then and that’s the expression I would use now of something going like this.
You could invariably rely upon him to say we continue to go in that same trajectory like this. We continue to go. And he was just plain boring. I found him to be a really uninteresting guy as someone from whom you might learn something. And therefore, when the crisis came and he had that wonderful expression that I don’t remember what it was now but you’ll remember what it was about something exuberance and stuff like that.
Gary Cohen: Irrational exuberance.
Michael Steinhardt: So, he was a guy who was a demigod for all that time who used terms like irrational exuberance and who allowed some sense and courage, the extraordinary excesses of the period. It was like the Pope blessing things going on in World War II. [0:05:00] That’s a terrible analogy but in some sense, I don’t think it’s terribly unfair analogy because you depend on certain people as your moral police. That’s what he was. And he didn’t act appropriately. In retrospect I think, he would acknowledge that.
Now, was that, going back to your question, a major reason for the tobacco? I’m not sure. I’m sorry.
Gary Cohen: Go ahead.
Michael Steinhardt: No, go ahead.
Gary Cohen: I was asking you actually a more – a narrow question which is when do you think the sub-prime problems which came evident in 2006 and 2007 really converted themselves into full blown great recession and narrowly avoiding another depression? Do you have a sense of when that moment tipped?
Michael Steinhardt: No, I don’t. I don’t for I’m the wrong person unfortunately to really be as sensitive as I might have been at other points because I wasn’t so involved. I mean you should know a little bit about my history. I stopped managing other people’s money in 1995 and from 1995 through today, I have 80 or 90% of my efforts to Jewish future. And that’s where I spend my time and I should be able to say I still have that machine and I still have this occupational hazard to take a look more often than not. But it’s not quite the same so I don’t have a great answer to that question as to the ingredients that led to excesses becoming so clear that they created the market tobacco that they did. Is that an answer to your question?
Gary Cohen: Yes.
Michael Steinhardt: Okay. Sorry.
Gary Cohen: When you were actively trading, would you say the market was more of an equity market? Because it seemed to me that this crisis was a debt crisis.
Michael Steinhardt: When I was active in the market, when I started in the ‘60s, in the ‘70s, some of the works that are common place words today didn’t exist. I mean one can’t but acknowledge and one should acknowledge the extraordinary technological innovations that have occurred in the last, 20, 30, 40 years in the financial world. And I don’t think they’re given enough credit. Phraseology, even basic phraseology like private equity, I’m not sure existed in the ‘60s. All sorts of things that are obvious and things that are fairly comfortable in the jargon even for the average investor were not at all used in the ‘60s, in the ‘70s into the ‘80s.
So, there’s been an extraordinary shift. Part of that shift has been from equities to a lot of other things you write. But it’s been much deeper than that. But it has been, you know, Merrill Lynch used to have a symbol, it has a ball and stuff like that and they used to say, investigate before you invest and the market is key to an individual investor who – and they used to have things about Mr. Jones is about to buy a 100 shares of General Motors [0:09:13] [Indiscernible] and Mr. Smith is thinking about selling a 100 shares of General Motors in Portland Maine and the process by which that happens on the New York Stock Exchange. And that’s what the stock market was.
And there was no television program about stocks. There was a fraction of the coverage. And sometimes, I kiddingly say today, that is a remarkable experience about up and dead role about what I’m about to say. I used to say that the market can’t help but be vulnerable to the light of the fact that 93.8% of the Jewish college graduates [0:10:00] that I now posing that want to go into financial services, it might be 93.2% but you get the point.
When I went into [Indiscernible] in 1960, it was an insignificant number. People then wanted to go to Eastman Kodak, and Triple M [Phonetic] and IBM and companies like that. And Wall Street was a dreaded, ugly, conservative, careful, uninteresting place. But how many – but the percentage of young people today wanted to go into financial services dwarfs. This is the second most popular occupation. And the compensation on Wall Street particularly in money management and particularly in performance money management dwarfs. The next five leading occupations combined come close.
So, you have to, in order to understand your question in broad terms, understand the change in environment that’s occurred where there is this extraordinary growth in interest, in money-making, in opportunity in this world. So, it’s not that that the crisis is only a phenomenon of the sorts of things that you’re likely to talk about. The crisis is a crisis or the fact that there’s been this enormous change in markets, globalization. When did the term globalization become a popular term? ‘80s, in the ‘90s? I’m not sure.
But I used to say, I wouldn’t invest in stocks of foreign countries unless I know the area code. People don’t think about the area code very much unless in Kuala Lumpur because they hear something about Kuala Lumpur. Can you invest if it weren’t Kuala Lumpur is on the map? I’m not sure I can. But there’s a market for ETFs in Kuala Lumpur. I mean the world has really changed and this has created this new environment. And this new environment is part and parcel of the broad phenomenon that is our – that is our financial world today.
Now, when you see Goldman Sachs on a stand trying to explain why they did these trades with [0:12:41] [Indiscernible], well, a whole new world, a whole new world. Those trades would not have been possible 20 years ago. Those securities would not have existed 15 years ago. So, when you talk about this, you have to put it in that context in order to explain it. And if you don’t put it in that context, you’re missing the point. Do you disagree?
Gary Cohen: Certainly, there have been a huge amount of enormous change even in the time that I’ve been aware of it which is not quite as long but I guess close. So, my take is that you think it’s been a good thing or is it a bad thing? And you think …
Michael Steinhardt: I wouldn’t even – I wouldn’t even try to answer it in those terms because I’m not sure that’s even relevant. It’s happened as part and parcel of this great growth that occurs in an uncontrolled way because of technology, because of opportunity, because this is – I can’t use the word capitalist to explain all but to where the opportunities are in a relatively free Western society. And they seem to still be where the opportunities are.
What’s the probability of your kids going into some company that produces what we used to call widgets? You know the phrase widgets? I mean you were in school. Didn’t they use the term widgets? No one produces widgets anymore. You know widget is? As we known [0:14:30] [Indiscernible]. I know that widget was something produced on a mass basis and that’s what people do when they grow up. They produced things like widgets.
But now, they do things on – up here on those machines. But I don’t know if it will ever be the point but the point is that all well-mean number, the best and the brightest today and the not so best and the not so brightest are attracted to financial services. [0:15:00] And they’re attracted to financial services because that’s where the money is.
I was one of the first ones to start a hedge fund. And why did I start a hedge fund? Because I can start one at the age 26 in a rather stead Wall Street environment where I could, because I was very brave, I was very bright, and I thought I could figure out stocks and markets better than people not twice my age. And that where else could I – a Jewish boy from Brooklyn, have my own business, be my own boss benefit or suffer based upon my own performance, my own achievement. Then that’s what it was. But that’s – it has been distorted because when I did it, and for most of my career and this is an important point or at least it was for me, I lived most of my career with very high anxiety because I felt that for me to do what I did, I had to be the best money-manager in America. And no one was going to pay me 20% of the profits plus 1% of the assets unless I was really the best. And I’m not exactly be the best every year but how to make money every year of market down and the market didn’t – I had all the tools and I have to be right up there.
And for my 29 years, I compounded gross at 30% and net to my investors between 24% and 25%. And do something like that, to justify what you were being paid. Think about the hedge funds today. Think about what they return. Think about all these guys is in? Well, we were 3% or 4% better than the T-bill rate. [0:17:04] [Indiscernible] but the fees haven’t gone down. The pay even had gone up.
So, what does that mean? What’s happened in the last 30 years? What does this suggest about the business? What does this suggest about the question you’re asking? It suggests that the world has really changed. The Wall Street was extraordinarily free-wheeling. That any sense of control, of morality, a sense that there were standard rules were really vague, outdated, and hardly bore upon the people who were the dominant people in this business. And that’s what I think really has happened.
Gary Cohen: When do you think that started to accelerate if indeed did or …
Michael Steinhardt: ‘80s.
Gary Cohen: In the ‘80s?
Michael Steinhardt: ‘80s and particularly the ‘90s. But as far as accelerate, I’d say the ‘80s.
Gary Cohen: Were there any events that …
Michael Steinhardt: it was the fact that the amounts of money made relative to almost any other profession were just mind-boggling. There other things too.
Gary Cohen: I remember the year that Mike Milken made $400 million. It was a lot of money, still a lot of money.
Michael Steinhardt: Sure.
Gary Cohen: Although it’s less than it was. I remember his kid brother made a $100 million because he was his kid brother. And that was the first time I think that people really started paying attention to what that industry was capable of producing.
Michael Steinhardt: And Mike Milken again, he was the hedge fund but for good or for bad, and there too is it good or for bad. I don’t particularly think that much of him but he was innovative. What did he do? He took low rate bonds and made them into securities that had markets that were not pure unadulterated crap. That went up and went down but you could sell them at any time under almost any circumstance and that was a whole different sense that existed before. And I think it’s – he provided a service in the same way that people who have created markets for all this other stuff that exist today of the markets for things that were unimaginable as markets have provided a service.
So, when you asked the question as you did earlier on, is this stuff more of a good or bad? It’s really hard to answer [0:20:00] because some people would say it’s been good. They really made markets in areas that didn’t exist before. Is it a virtue? People – has the average investor benefited from all these new markets? Has the average investor done well in the last 10, 20, 30 years? My inclination is no. my inclination is that the average investor has not done well. My inclination is the average investor has gotten screwed on balance. That if you look for instance and this is minor, the real cause of the mutual fund industry is egregious is a joke. And the reason ETFs are doing well is because mutual funds are a shanda. Asked them to explain to you what a shanda is.
Donna Norman: Shameful.
Michael Steinhardt: Thank you. A shanda. The mutual funds are a shanda. That’s what they are in terms of how they charge, hidden charges, all that sort of stuff. But that’s been the way of the world. They’re not going to change it. I’m not going to change it. But mutual funds are charitable? Disgusting. And did they really provide a service? Well, if you define service very broadly but for all those people who are carrying around mutual funds and picking stocks and people who are very serious even with companies, how come they all underperformed in the [0:21:28] [Indiscernible]? Most of them underperformed in the average. How come we all stink? I have a serious question. What are the answers to these questions?
So here you are trying to answer a rather honest, narrow, confined question but I don’t think you can do it without thinking about the sort of things I just focused upon. I don’t think so. Even though I guess you got to answer the question that you were asked to answer.
Donna Norman: Looking at historical forces that occurred and accelerated, that occurred over the past several decades affiliate in this quite [0:22:20] [Indiscernible].
Michael Steinhardt: So, what do you disagree with? You met many people I assume by this point.
Gary Cohen: Yes.
Michael Steinhardt: Okay. Is my view an out layer view, a general view? Is it – people concentrated more on the immediacy.
Gary Cohen: It’s interesting. We spoke with Arthur Levitt a couple of days ago, he’s not that far off of where you are. He was in the trenches for quite a bit of that time. And we met with Sandy Weill [Phonetic] this morning and he wasn’t quite in the same direction. [Laughs]
Michael Steinhardt: The last time I saw Sandy Weill is at Christian high school at a party. I don’t like Sandy Weill too much.
Gary Cohen: You get to a certain stage I guess that you could say whatever you want.
Michael Steinhardt: Who’s going to listen to him? In any case, I always [0:23:23] [Indiscernible] at a party, Arthur, Carter [Indiscernible], and I see him there. And I asked him same question you were asking me. I say, “Sandy, what do you think the cause of this great market tobacco was?” Then he looks at me and he must have been asked the question. I say, “Sandy …,” I asked him again, “what do you think? When this is all said and done, what will be the – when the history books are written, what will they say?” And someone from the back yells out, “I think it was Greenspan.” Funny. “I think it was Greenspan.” He really was screwed up. And I said, “You can’t quote Greenspan.” I say because he wasn’t pernicious. He didn’t get rich from it. You can’t blame it on Greenspan, I say. And I go back to Sandy Walt. And I say, “Sandy, what do you think the reason to this was?” And finally – and then at the same party is Barbara Walters, she turns and looks at me, she’s sitting next to me and she says, “Michael, you imp. Why do you keep doing that?” [Indiscernible], [0:25:00] I’d like you to know, if only think I take her one was I picked the wrong successor. And that was the end of the conversation. So, I don’t know if that was insightful to you in anyway but when you mentioned him.
Gary Cohen: But he’s very circumspect this morning.
Donna Norman: What answer were you hoping for?
Michael Steinhardt: Well, I was hoping to provoke him. He made so much money and kept it and had that disgusting Jewish smile on his face which I never – I just never liked the guy. I mean I just don’t like him. I don’t know why. But the truth is in fairness to him, people who knew him from Citibank say he really did a pretty good job. He left while things were sort of intact. So I don’t know. But I just didn’t like him. I didn’t like the style and the pomposity and the way he put his name on everything that philanthropically that he ever did and just wasn’t my – I don’t know. I shouldn’t talk this way, right?
Gary Cohen: You can talk any way you want.
Michael Steinhardt: [0:26:20] [Indiscernible], do you know what that means?
Gary Cohen: Excuse me?
Donna Norman: [Indiscernible].
Michael Steinhardt: Thank you. Okay. Let’s move on.
Donna Norman: Putting bad words that can then not be contained.
Gary Cohen: Yes, I do know. It’s one of the greatest ever since. So, an idle tongue or a – the – go ahead.
Donna Norman: To be devil’s advocate …
Michael Steinhardt: You may.
Donna Norman: One of the reasons perhaps, just agree or disagree that compensation increased dramatically on Wall Street was that there were these really smart hedge fund guys who however much the folks on Wall Street were making were earning multiple stocks.
Michael Steinhardt: Right, correct. I don’t think it’s devil’s advocate. It’s true. It’s true. I mean when I thought about – I was – I didn’t know that much about hedge funds when I started my own. I was asked by Howard Berkowitz to pick him as partner and he explained to me what a hedge fund was. I really didn’t know at the time. I was a little pro and he’s been doing really well as thousands of brokers have at the time as an analyst. And he called me about a hedge fund and oddly for me at least, I didn’t much care about the money. I didn’t care about the money. What I cared about was what I did. I don’t care about my background. Did you read anything about my background?
Donna Norman: I did but maybe I didn’t go far enough.
Michael Steinhardt: Okay. I grow up in [0:28:13] [Indiscernible] where stocks were like Swahili. They were very, very remote from the world of lower middle class people. And my mother and father were divorced when I was a baby and my father wasn’t around very much. And when he came to my Bar Mitzvah, he showed up and he was a perpetual gambler. And he was being arrested in floating crack games and purposeless things. And he apparently have been gambling with some stock broker from R.J. Reynolds Company and the guy coned him into buying a 100 shares of two different stocks. And at my Bar Mitzvah, he gave me these 100 shares of these two stocks, [Indiscernible] Cement and Columbia Gas. He said, “Here, here’s your Bar Mitzvah presents.” And the money of those two stocks was $5,300 which in 1953 was like the end of the world.
Gary Cohen: You can buy a house with it.
Michael Steinhardt: Whoever heard of $5,300? And that changed my life. And from that point on, at the age of 13, forever, I was just so interested in the stock market. The only and the idea of buying and selling stocks being right, that was my total interest. I wasn’t interested in building an estate. I wasn’t interested in [0:29:50] [Indiscernible]. I was just interested in being a stock broker. That’s what I was interested from then until I stopped.
So [0:30:00] – and I wasn’t interested in making – in the money I made either. I really never even knew at the end of each year. I don’t have a guess as to how much money I make because then all I care is about the performance. And that was my life.
So yes, I made a great deal of money as did others. But it wasn’t – I was just so committed to being the best and I’m not sure as time went on, other people were more sensible than I was and they interested in the fact to make so much money. And then it really grew and it became the most exciting profession in the world. Hedge funds, private equity, I mean the whole gamut of performance money management. But it’s that mentality where the money managers really dominated. The brokers dominated the financial scene. And their own gizmos, their own product, have you ever heard the term products?
Merrill Lynch just introduced three new products related to markets and mortgages and God knows what else these were, is my language. A whole new products. We’re not seeing these products in the ‘70s and ‘80s , in the ‘60s, in the ‘70s and in the ‘80s. You don’t hear about products. Those are products. Product was something new, devised by some wise guy on the Wall Street to give you a new way to speculate.
Gary Cohen: When you were running your fund, did you leave most of your assets in the fund?
Michael Steinhardt: Yes.
Gary Cohen: That’s somewhat of a difference that in terms of getting the game has been used a lot in the US a couple of years because of the whole ability to package mortgages and sell them off to investors and not have any consequences.
Michael Steinhardt: Yes, it really changed from the early part. The early part, it was really a matter of pride. I had one really bad year, 1994, when I just screwed up. And I was horrifically depressed. I can’t get out of bed because it was so much part of me. I never separate myself from my performance. That was not the case after a point with most people who got into the business. They did it for the money.
Now, if I’m sounding self-serving in how I describe myself, I don’t quite mean to be but what I do mean to say is that there was this great shift that went one from the early phase – stages of performance money management. Plus then, it was really rare. I mean why should you get 20% of someone else’s profits and then charge 1% of the assets as well when the average mutual fund was charging half of 1%, a three quarter percent of the assets and that’s all? What were you doing to justify that difference? You had to be a genius. You have to do so much better to justify but that’s what it was.
But then they extrapolate that to all the other stuff that was going on, all that mortgage, all that other stuff and you get to the climate that existed in the ‘80s, ‘90s, blah, blah, blah, blah, blah.
Gary Cohen: Do you think the change you see in the investment banks, where would you much go from partnerships to probably trading corporations, did you notice any difference in the way they serve their clients, the way they acted?
Michael Steinhardt: Of course, Goldman Sachs was once a client-oriented business. It’s no longer a client-oriented business. I mean word, proprietary trading that comes and dominates those people, doing things for one’s own account dominates what they do. It did not dominate what they did for the most of their history.
Gary Cohen: And do you think that’s because they went to a corporate form or …
Michael Steinhardt: I don’t know how to answer that question. Form doesn’t matter. I think what matters is that [0:34:41] [Indiscernible] run the business wanted to run the business in such a way as to take best advantage of their opportunities. They think it was best done through some form. Form doesn’t matter. But the guys – the partners of Goldman Sachs wanted to make the most money they could.
Gary Cohen: [0:35:00] Well, that part hasn’t changed.
Michael Steinhardt: Yes, but what form they used.
Gary Cohen: But another question I was asking is whether or not if they had so much more of their capital invested?
Michael Steinhardt: For most of the years that I was – not that I was very close to Goldman Sachs as a firm, they were required to reinvest almost all their money, maybe they still are. I don’t know. But Goldman was really different from most of the other firms. They were required to reinvest their money and there was a partnership and they were the best firm around for that reason if not others, long before they went public and all that sort of stuff. They were the best firm there was.
Gary Cohen: You had mentioned Greenspan, do you think that there should have been more regulation in the financial community? You sound very jaundiced about how cool financial innovation there had been in the last 30 years.
Michael Steinhardt: I don’t mean to sound so much jaundice. What I mean to say is several things that number one, the idea that one can have financial regulation that is truly fair is an idyllic concept. It’s an idyllic concept. And I don’t know what exactly to do about that but it’s just not possible on this earth. And the more complicated things become the more idyllic and more remote, fairness in financial regulation somehow becomes I believe. So I deal with that – I don’t know. But what bothers me is not the fact that financial regulation doesn’t and hasn’t succeeded is the pretense, pretense on the part of – who took the blame at the SEC for their great failures? And they had serious failures there but it was as if no one was around to say, we really screwed up fellows or who hasn’t? It was – they were dealing with a world where success and failure was measured in a bottom line. They were regulating financial industry but their own success or failure had no such measurement. And that contrast was really uncomfortable I think for a fair number of people. Do you understand what I just said? No?
Donna Norman: I’m not sure.
Michael Steinhardt: Well, if a Wall Street firm failed or if a Wall Street firm did something that it shouldn’t have and was forced to pay a large fine or fire a lot of people, it was fair – some of it was fairly obvious who were people got fired. They were immediate obvious remedies.
Donna Norman: I think that all of our division head at the SEC were swamped out I think. The broom was wise but …
Michael Steinhardt: Is that what happened?
Donna Norman: I don’t know.
Michael Steinhardt: Well, if that’s what happened then I’m wrong. All the division heads were changed?
Donna Norman: It happened, yes. It happened.
Michael Steinhardt: For what period of time?
Donna Norman: About a year.
Michael Steinhardt: Really? That hasn’t been widely enough acknowledged. And who was head of the SEC at that time? Cox?
Gary Cohen: Yes.
Donna Norman: Cox. And then trading market has swamped out and then unfortunately I don’t see why it changes.
Michael Steinhardt: Okay. But wasn’t Cox there three, four, five years ago?
Donna Norman: Yes, he was there [Indiscernible].
Michael Steinhardt: I don’t know. I just didn’t sense it. You may be right. [0:40:00] That there was the same sense of reward or certainly punishment there. I may be wrong.
Donna Norman: What would you want to se?
Michael Steinhardt: I would have wanted there to have been some fairly decisive conclusions drawn about the performance of those people and that’s what I wanted to see. You think I’m wrong? You disagree?
Donna Norman: I think you’re wrong. [laughs] We’re reluctant to state our views because that’s not our turf.
Michael Steinhardt: All right.
Donna Norman: We just [0:41:00] [Indiscernible].
Michael Steinhardt: Okay. Now, I’m speaking totally comfortably and without constraint.
Donna Norman: I don’t think you could be wrong about your opinions.
Michael Steinhardt: Okay. I just felt going back to the statement I made a long time ago that I didn’t get a sense, and you will remember this statement, in this period of time that right and wrong are appropriately dealt with. Remember when John was still here, I think I said in a slightly different terms that the bad guys didn’t get punished. And I just didn’t feel that this period led to – I mean the guy who ran Lehman Brothers was a third rate [0:42:01] [Indiscernible]. He was a salesman who grew through the ranks and he just wasn’t quality person in my view. Just wasn’t. And what’s going to happen to him? Nothing. Thousands of people have disappeared. Thousands of people have lost their life savings. And now, he’s happily testifying and blaming whoever he blames and life is going on. No one was going to jail. No one is really being accused of illegal acts. Were there no illegal acts here?
Donna Norman: What’s your view?
Michael Steinhardt: I’m not close enough to really know specifically but there were illegal acts that are – acts that can be prosecuted. My strong intuition is that there were. That this was a debacle. That this was a terrible experience for America. And yet, who is – you can’t say, you guys are having a commission and you’re trying to find out what happened. Where were the evil doers? Was there no evil?
Donna Norman: This is an interesting question.
Gary Cohen: And it’s one that I guess a number of people who sat on their desk, was the crisis a failure of men or was it a failure of a system? And if it was a failure of men, then you get better men and women. But if it was a failure of a system then there’s something fundamentally flawed in the system. And people have different views of that.
Michael Steinhardt: I don’t think you can so comfortably [0:44:29] [Indiscernible] between men and the system. If you’re a running leader for a number of years, you have enormous discretion. You can use x amount of leverage, y amount of leverage, z amount of leverage. You can say all sorts of things publicly that very few people [0:45:00] are going to really understand in discussing your financial circumstance. You can do all sorts of things that create more cloud than clarity. And it’s very difficult with the complexity of the system that existed then and exists today for the average prosecutor or the average informed individual to really understand exactly what went on particularly a few years or more than a few years afterwards.
And basically I think for those reasons there’s been very few criminal prosecutions. But I think there were many, many by my standards, criminal acts. If you can understand that distinction, may be I’m wrong.
Donna Norman: Do you have a view about the relationship between the Wall Street firms or the investment banks and the commercial banks and the regulators are more that the relationship, for example, say I’m more a New York [0:46:22] [Indiscernible].
Michael Steinhardt: I mean certain other things were again, used word that you weren’t supposed to understand. Shanda was something deeply wrong with the rating systems. Are those with the system, is there some criminality there? I don’t really know. There is something terrible there. You have to be deaf, dumb, and blind to have rated some of those securities the way they were rated. You couldn’t be a serious person working at Moody’s or at [0:46:58] [Indiscernible] or the other few rating systems and rate those securities as you did. You couldn’t be. Is that criminal? Was it negligence? What was it? No one was going to jail for that.
Now, I’m not smart enough and wasn’t close enough to know the intimate details but it’s impossible to someone at those firms who have just blown it. Impossible. So, are there other examples like that? I think so. I mean the idea that the well-publicized Goldman [0:47:43] [Indiscernible] trade and there must have been hundreds examples like that. Is there something immoral about that? My guess is yes. But who’s going to be solemonic [Phonetic] enough to understand what’s criminal and what’s not criminal there? Who’s going to be?
Donna Norman: I didn’t know it was a funny book. These are good points.
Gary Cohen: That really then raises the issue of what would have been – if you can’t rely on a Dick Fuld or a Jamie Dimon or [laughs] I’d take your comments, to run their businesses because occasionally someone will rise to the top and maybe underperformed. How does a system account or deal with for building redundancy? I don’t know whether …
Michael Steinhardt: Those are really good questions, which goes to the heart in some sense of a system, a broad system where we really allowed going back again, this broad question, the technology and the individual opportunity to just run wild. Nothing wrong with that I guess. And you might say, well, what did Dick Fawn really do wrong? He just played the game a little too vigorously. He had just a little bit too much leverage? He just didn’t know when enough was enough? I mean is that the way to look at it? May be it is, I don’t know. By historic [0:50:00] standards, if you compare the Lehman’s balance sheet and the Lehman’s ratios with Lehman ratios 10 or 20 or 30 or 50 years ago, these ratios then were absurd. But may be that’s unfair to compare it with their financial ratios 10 or 20 or 30 or 50 years ago because the world had changed. I don’t know.
And who am I or you or anybody to say that the world hadn’t changed and they were really right? And who was the authority that was looking over their shoulder and saying, the fact that you got x to 1 cash or xx to 1 cash, is it right? I don’t know.
Donna Norman: Why did investors allow it too?
Michael Steinhardt: Which investors? Investors of Lehman?
Donna Norman: Yes.
Michael Steinhardt: Well, that’s a good question too.
Gary Cohen: And the lenders to Lehman should have been [0:51:04] [Indiscernible].
Michael Steinhardt: They were in the same game mostly. But some did and some were sensitive but again, some of them were in the same – they were getting rich in the same way Lehman Brothers getting rich. Most of them, if they were on the opposite side, but this was a circumstance where the commercial banks, the investment banks and they were all part and parcel of one system. And look what happened to the banks, commercial banks. And everybody got best of the – there were no heroes in that sense. And who suffered in the end?
Gary Cohen: Well, the popular message that the financial community has come out okay and the rest of the country is still sweeping up.
Michael Steinhardt: Is there something to that myth?
Gary Cohen: There’s a fair amount of truth to it. Let’s look at the 2009 profits, they were [0:52:20] [Indiscernible].
Michael Steinhardt: I think it’s astonishing. I think so too. Coming back to my original statement, there is something that doesn’t seem right about this. Corporate America is rolling dough and the number of people they employ is considerably fewer. Their margins are fantastic. They’re really doing well including Wall Street. Wall Street doesn’t stand out the way they used to but it’s a strange time. The Liberals [0:52:57] [Phonetic] have not exactly shown of what I have to show for a higher government expenditures and all sorts of things which doesn’t seem to work. It’s a strange time.
The average investor hasn’t done well. Instead of creeping back into the stock market a little bit as the market makes new highs. I don’t know. It doesn’t seem anybody is. There doesn’t seem to be fairness in the system. But I bet you, if there were good to consumer surveys made about the system and optimism and pessimism, it wouldn’t show too well for America at this point.
Donna Norman: When you talk about fairness, you say that it’s idyllic and you make a point that …
Michael Steinhardt: Ideas were idyllic to describe financial regulation, yes.
Donna Norman: And you seem to be saying that fairness isn’t in the [0:54:01] [Indiscernible] now or in the future. What is the fundamental that makes that not as achievable?
Michael Steinhardt: To spread information, to spread knowledge or also some desperate phenomena that will invariably give some people great advantage over others and that financial regulation can only touch upon a meliorating some of those elements of desperateness. And probably that’s not strong enough answer but I think it’s one of the answers. Agree, disagree? What do you think?
Gary Cohen: Differences in information have always been a problem. Even the best with the SEC is supposed to be about. That’s when a lot of the regulations with that [Indiscernible].
Michael Steinhardt: Yes. In essence, it can’t be [0:55:00] about that. It can’t make Mrs. Jones as knowledgeable as some corporate treasurer who has a relative. I mean it’s just too much difference in quality of information is just inherent.
Donna Norman: You previously said that the system run wild or money-making run wild.
Michael Steinhardt: I think so.
Donna Norman: So, is it the regulators to end the running wild or is it for more moral humans?
Michael Steinhardt: Well, that’s a great question. That’s a great question.
Donna Norman: Or is it for more insightful investors?
Michael Steinhardt: That’s a great question. When I used to – like I don’t want to keep picking on him, I don’t mean to be. When I saw an article, it was the front page article in the – front page headline in the Post and the title was, Pigs Lie. And it was – you saw it?
Donna Norman: [0:56:17] [Indiscernible].
Michael Steinhardt: Exactly. Is there something wrong with that? I see nothing wrong with that. He hadn’t worked there for five or six years. And the deal was that he would have free airplane availability for whatever he wanted for his family for the rest of his life. Do you have free airline availability for the rest of your life for anything?
[Laughter]
Gary Cohen: That would be very nice.
Michael Steinhardt: Do you? Then why is he such a super human being to have that? Is it fair? I don’t know. It doesn’t seem to me. Give me a fast deal. Maybe that’s part of our system. I don’t think its right. Do you?
Jamie Sacron: We’re not supposed to answer these questions.
[Laughter]
Michael Steinhardt: You have three more minutes then I got to go.
Donna Norman: Back to Federal Reserve and its relationship with Wall Street, comments on that.
Michael Steinhardt: Well …
Donna Norman: I guess about Dick Fuld, about Sandy Weill, both at certain times had seats on their board.
Michael Steinhardt: Well I think the Federal Reserve has many at least to keep itself in its peculiar academic dress above question in terms of integrity to which I give it credit. For a long time and during the Greenspan era and before and maybe even now, there was and is this hanging on every word [0:58:20] [Indiscernible] with that says that conditions continue moderate however there is a slight movement toward greater [Indiscernible]. I mean because it seemed too important because you sensed that whoever was writing that thing has such capture, has such command of the English language that whatever he was writing really has such great understanding of the nuance of the economy. That those words captured all the nuances that the most intelligent, wise, knowledgeable people had.
And therefore, those statements were just focused like nothing else. It wasn’t true, isn’t true, won’t be true, blah, blah, blah, blah, blah. But the fact that they were given such focus is a suggestion that they maintain their integrity. It’s a plus. Beyond that, I mean my feeling is number one, of course, they’re mere mortals. Number two, with this guy who was in there now, I think they just got a little bit market followers. They don’t mean that much to me but that doesn’t matter. You can have people doing it and they’re doing their best.
I don’t have much else to say about that. I don’t have much else to say about that. I think he’s crazy keeping interest rates as low as he is but at some point, [1:00:00] he’s going to have to do something different and he’s going to have to do something that’s going to deal with this artificiality. And I think if there’s any problem I see with present policy and in a certain sense with policy over this period and with America in general, it’s a feeling that no one is prepared to withstand pain. And that’s a relatively new thing in America. No is prepared to say, “My fellow citizens, we’re about to go into a difficult period and it’s going to be hard for all of us and we’ve got to swallow deep and suffer a few years of lousy economics and high unemployment. And we’re all going to be in it together and we’re going to do out best to get out of it.”
There never stuff like that. Always avoiding pain rather than acknowledge it. At certain times and certain ways, pain is necessary. And I think by his – by that – if he was doing that with interest rates and other things like that, that’s what they’re doing. They can’t accept the fact that sometimes you got to have pain. And pain isn’t the worst thing in the world as long as it’s justified in the long run.
So I think keeping interface at these levels, which really screws some people who are in the least position, least able position to deal with it, pensioners and other people who depend on interest rates. You got to be crazy. You got to be crazy to make the whole world dependent on the whim of some schmucky academic from Dillon, South Carolina or wherever Bernanke is from. I think that’s crazy.
Gary Cohen: Princeton.
Michael Steinhardt: Princeton, big deal. Yes, so what? That’s my view. I don’t think they should do that. I think they should be more prepared to say, listen, we’re going through a difficult period. We’ve got interest rates down a great deal. And that’s about all we can do in that respect. And I’d like to go a little bit longer, a little bit less lower, we can’t. That was what he can’t tell. But we’re not going to do things that’s so artificial. There is much artificiality on the other side. And they don’t know that. They’re so focused on the immediate. They’re so focused on the next month’s statistics. And that is a big mistake. I would say, there’s one mistake about that policy, this is extraordinary [1:02:42] [Indiscernible] never acknowledged it. This is extraordinary focused on the immediate of the next month and the next two months or the short-term. That’s a big mistake.
Jamie Sacron: Chairman Michael has spoken.
Gary Cohen: Is there anything – I think yes, it’s pretty close to 4, is there anything that we haven’t asked you that you wished we had?
Michael Steinhardt: No, no. I’m sorry if I’ve been too broad but when you get to be my age, I’m just considerably older than you, you tend to be a little bit broad in your comments.
[1:03:20] [End of audio]
