Mario Gabelli, Charley Ellis, Jon Corzine, Cliff Asness, Stephen Pagliuca, and Marc Lasry were speakers at the 2017 Prime Quadrant Conference in Toronto, at the Carlu. The Prime Quadrant Conference is an annual conference for family offices and ultra-high-net-worth investors. http://pqconference.com/ Below is an excerpt from the Corzine speech and the video embeds from the conference for each speaker
Value investors have been enjoying a recovery of value strategies, but one fund manager says that won't last long. At the Morningstar Investment Conference on Monday, Michael Grant, co-CIO and head of long/ short strategies at Calamos, said growth outperforms value during Fed hiking cycles. What To Do When You're Not Fighting The Fed He Read More
[00:05:15] GOLDMAN What do you think contributed to your early success.
[00:05:20] You know one of the things I've heard from almost everybody today is a little bit of luck happens in life for most of us. We're blessed with. Good circumstances you have to seize those moments. About six months into my tenure at Goldman Sachs sitting on the bond trading desk the government bond trading desk and. Learning. The business of making markets. I came into work and. 10 out of 12 people had left and went to E.F. Hutton. And there was this. Irish guy who had graduated from high school and me sitting there.
[00:06:02] And we weren't invited. And I. Said. What's this all about. And. So happens that they didn't replace all those people for about three or four months. And I got lucky enough to do better than what they'd done in the previous two years. As somebody said maybe that young man has some talent. Brought in another crew of people more or less. And after about a year and a half. They let all those guys go and the only guy who's still standing was me. And it led from there and most of you know probably that up until the mid 70s the bond market was the sleepy port Mariel's around here. It was fun to be in stocks but people that got sent off to the bond area where. It just wasn't an exciting place. And then things like futures and options and. Cutting up and stripping bonds and doing things that have led to an enormous amount of activity in the market along with Paul Volcker raising short term rates to 20 per cent and that. At 14 percent yield that people could see on Treasuries. Created an environment that was really attractive and I was fortunate enough to be at the right time learnt a lot of the things apply a lot of the things that I learned at the University of Chicago to two markets and it worked out OK. So former secretary of the Treasury Hank Paulson your former partner at Goldman called you quote a legendary trader.
[00:07:47] And you were committing hundreds of millions of dollars of Goldman capital and the government bond market. So so what what gave you the confidence and the perspective on being able to invest that capital and do it so well.
[00:08:02] First of all I didn't do that alone. You heard Cliff Asness. Speak earlier this morning. One of the things that I've always taken pride in is surround yourself with people that are smarter than you and you didn't notice that guy's pretty smart when he was discussing how. They look at markets. We in my area of the hired Fisher black. To help us put together. Option Models about 1987 1988. Fisher had given me a C minus in his finance course at the University of Chicago when he's about to be a partner at Goldman Sachs. I called him in and said Do you remember me. And do you remember what. I got the sense I get to great you now. And now. Fischer and I became and worked very good friends. But that's how you are able to manage risk to tell you are able to do. Great things in markets. It's really the people that you work with. I think there's too much personality focus. On. How.
[00:09:18] Markets work. It's really you have to have people that. Work as a team. Great ideas. And. Goldman Sachs which had a balance sheet of. Maybe 50 million dollars in 1980. By the time I kings and your partner had a balance sheet of 450 billion dollars. And. By the time I left. Goldman Sachs had a trillion dollar balance sheet. No one person does that do that because you have the right people in the right spots.
[00:09:51] Making good decisions. And I've been blessed with having that most of my life.
[00:09:57] So how do you pick the right people. Is it culture. Is it intelligence. Is it passion is integrity. What goes into your assessment of. Really great superstars. Well. Somebody I think it was Charlie said characters are the most important issues so you you you've got to start. At. A level where you have a trust. Feeling that people are people that you can turn your back and know it's good to be secure. And that they're thinking about more than just themselves as they operate in in a business where.
[00:10:39] Greed sometimes is called Good. This is an important ingredient then you got to have smart people. It's just as you know and the third thing I would say is you. And Goldman does a great job of this and even today you just got to work hard. This is. That formula of being bright and hardworking. If you have good character I think gives you great opportunities to succeed in life. I think that's true not just in finance it's saw it. Among. The more successful people or at least admirable people in politics as well and. Seem. Hundreds and hundreds of clients and my wife and I've always felt that about the people that you're trying to do business with. As a potential.
[00:11:38] Investor for clients I think it's just as important to assess who your client is as it is them to assess you so that you're dealing with people that you can have the kind of straightforward character relationship you have with others. So by 91 you became the CFO of Goldman.
[00:11:58] In addition to running the government bond department and actually it was a fixed income broader more on GE's distress. By 1991 I wasn't really a trader. It was a risk manager and overseer. Of. Folks who were doing the work I gave. Gave it up. I was not. Trading on a desk by about the mid 80s. So for the first couple of years 92 93 you made several billion dollars a year and then in 94. Made a very visible runaway bet on interest rates. And literally losing partner money to the tune of hundreds of millions of dollars a month. And partners are walking out the door.
[00:12:55] Including the senior partner. So what was it you did once you were made CEO to stabilize the business to really kind of get things back on track. First of all Mark Lazarou talked about.
[00:13:10] It bought at X and then they bought 70 than they bought at 60. Then they put a bid in it 30. I've been there done that is not. It's never fun and it is particularly uneasy for people who are not. Familiar. Or have not. Been a party to. The kind of volatility that can happen. In the investing world. So the most important thing that I was able to do in 1990 4 and 5. Was give confidence to people that we didn't know what we were doing and we were making judgments probabilistic judgments that were.
[00:13:56] Sound. They could be wrong. But they were sound. And as it turned out many of the things that. Did not go right in 1994 when exceptionally well in 1995. And. And I think as has been described. By other speakers taking a long term view of returns on capital is a much better way to look at things. Than. The risks that you see at a given moment in time or the joy that you might see at a moment in time when you're doing very well even knowing that out is a.
[00:14:45] Is a responsibility of leadership in an organization. That.
[00:14:51] Business is about managing risk and so I spent a lot of time on that a lot of one on one time. We also went out and got some additional capital that I was able to draw into the firm. That gave people confidence. And. The turnaround was reasonably. Propitious and world went forward.
[00:15:14] One of my favorite Janken Corazón quotes is you can't run a company with three or four hundred million dollars in capital.
[00:15:22] If you're operating in 26 countries and have a 19th century capital structure so that was really the juncture where you went out and started to explore a range of options from mergers to ultimately what was the Goldman IPO. So can you take us through your thinking during that era who you were talking to and how you ultimately came to the decision to go public. If. In the mistakes or the challenges that you face in life if you don't learn in advance.
[00:15:59] How you face your future I think you make a mistake. You describe that. A large number of partners did walk out the door with their capital in 1994. Most of them. Pretty much regretted that by 1998 99. Fairly substantial. But it was in my view and I think the partnership's view after a very long and. Strenuous and sometimes acrimonious discussion about whether we should make permanent our capital or whether we should continue as a partnership. Was debated and.
[00:16:44] I think the strongest argument I made was if we were going to continue to be in the risk business. In addition to the advisory business. Well. We had to do something about making permanent that capital. And. Certainly we lost. The intimacy and. The personal nature of. The nature of the partnership. But when you're running a 50 million dollar balance sheet and you're running a trillion dollar balance sheet there there's a disconnect doesn't it doesn't make sense and that's where that phrase comes from. And ultimately that was the winning argument with. My partners who voted in a secret ballot to go forward with. That. Often it is fraying that people were. Looking to capture the value of a franchise that was build up over a long period of time. We tried to spread that out give. Benefits to partners retire. We set aside money for a foundation for charitable giving and going forward proud to see that Goldman Sachs and foundation is still one of the. Most active and. Effective. Providers of that and we set aside money to give to future potential partners never be the same relationship. But I think the place and the organization were a lot better off to face the kinds of circumstances that evolved. 2008 Goldman Sachs would have not survived if it had been in a. In a partnership relative to the permanency of capital. Or other things that come with that. But. It was. I think a long run rate decision for a firm that aspired to be the best in the industry.
[00:18:45] Just to follow on to the imperative of having enough capital. It reminds me of 1998 in the fall when Long-Term Capital essentially blew up.
[00:18:59] I think it was leveraged 100 to 1 and they had partners that were ex Salomon Brothers ex Nobel Prize winners in finance. And initially they made a lot of money.
[00:19:13] But after the Russian default they really had enormous losses very quickly to the point where it became a systemic risk to the entire industry. So tell us a little bit about how you got. The leaders of Wall Street firms to come together with the Federal Reserve and bail out long term capital. The long term capital problem. Was that.
[00:19:46] Credit departments didn't work with each other or didn't share information and so what no one really knew what the book of LTC the long term capital looked like.
[00:20:01] And so no one knew the exposure and there were no reporting rules for hedge funds and no one had oversight of. So. It was a shock. To the system when. It became known that they had the kind of leverage that they had. So 100 to 1. Depending on how you define leverage by the way. Anyway that's that's what was circulated. There would have been a run on the bank. And since so much of that. Buildup of risk was in instruments that had not been tested.
[00:20:40] In times of stress. Interest rate swaps credit swaps all the things that are common to markets now.
[00:20:47] And with no margining requirements are different margining requirements for different people.
[00:20:53] It needed it needed to be very carefully addressed. The Federal Reserve knew that. Her balance and that who's now deceased was the Senior Capital Markets person at Merrill Lynch myself. One or two other people. Got in the room with. Bill McDonough at the Federal Reserve. We had to do that. Under the auspices of the Federal Reserve because we would have been an antitrust violation collusion and sitting around. And. We. Said this was partially of our own creation. It's not just. Not just long term capital. And so we all piled in putting money and.
[00:21:44] Most of us put in 500 million dollars. I think we got our fun together of private sector resources of close to three and a half billion dollars. That then was used to buy time to. Unwind. The long term capital positions without having a shock of.
[00:22:05] Bankruptcy and throwing it out into the system and with a potential systemic risk. Frankly it's one am.
[00:22:14] I. I consider it one of my more proud moments in life because there were a bunch of people that didn't want to do that. Both Goldman Sachs and among. Other organizations around Wall Street vied. For the betterment of the system as opposed to having the federal government do the bailing out. The people that helped create the problem needed to do that since self-insurance is a good idea.
[00:22:44] I thought we should participate. We did. It ended up working out. Actually the group ended up making little bits and pieces of money is long term capital positions were soundly.
[00:22:56] Constructed minus the leverage. So surely after today your partners at Goldman Sachs asked you to step down.
[00:23:06] And that might have been really impactful and in a very challenging time in your life. What do you think contributed to that and and how did you kind of get through that. That whole episode personally. Well. These are complicated stories and it to be.
[00:23:27] It's in the eyes of the beholder. One of the issues is that. At least some of my partners would have claimed that I committed the 500 million dollars to long term capital.
[00:23:39] Without having it fully vetted with the management. I personally don't believe that was the case. But that's that was the argument. The second is that whole period of time to. Refresh people's memories of the potential of risk. That comes from trading positions. And so while we didn't we didn't have a. Heavy loss in that period. We were basically breaking even. The reminder of the Russian crisis also. Developed concern among some of the partners that that this was not a strategy they wanted to follow. Until we were public and so they took the actions that they did. And. I was disappointed but. They went ahead with the public offering and. And continued build the firm along the strategies that