Eddie Lampert: Starting to See Risk-Taking Coming Back

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Discussing the influence of legendary dealmaker Richard Rainwater, with Eddie Lampert, ESL Partners founder and Sears Holdings chairman; David Bonderman, Texas Pacific Group founding partner; and Barry Sternlicht, Starwood Capital Group chairman & CEO.

Updated with COMPUTER generated transcript

thank you. we’re micing up to the world’s most powerful investors. they will join us in a rare television appearance to talk about the influence as we have been the entire show of legendary deal maker richard rainwater, and the influence he had on their high-profile careers. we’re going to be talking to david bonderman, founding father of texas pacific group and eddie lampert, esl partners founder. sears holding chairman and we continue our guest host for the morning. you were partly responsible to corral these two to come in here. we’ve known barry since he had hair. that was a first. i lost it at the age of 2. no that’s not true. the @reason, and i just outlined the great richard rainwater, and we’re talking about this, the list of players that somehow were inspired or discovered by him. it’s phenomenal. can you explain it, eddie? i met richard in nantucket. i went with two other guys from goldman sachs to visit dan stearn and with no expectation dan said richard wants to have lunch with you guys. first time we met bigger than life. bigger than life. filed the room? yeah. he filled the restaurant. but he was very casual and very inspirational. his pitch was there’s life after goldman sachs. he was there for two years. and at the time i was thinking about, you know, what i wanted to do, whether i wanted to leave or whether i wanted to stay. i went to visit him again the next weekend and pretty much spent the whole weekend with him. was it ’88? summer of ’87. for me you had a one hour packing and he sent you packing. he immersed himself in your life. you’re able to immerse yourself in his life. what did you know about him at that point? disney was already legendary at that point? i was at goldman sachs. the bests were already known in the financial co at that time. they weren’t broadly known. they had done the disney deal and were involved with disney. i knew richard’s name but i didn’t know much more about him. so, but when i met him, again, there are certain people you meet in your life and it was one of those moments where you say this guy is something special. disney was buying gibson group. they were going to buy gibson greetings and put mickey mouse on gibson greeting cards. were you there? i arrived just when that was being done. you should explain how you know richard. yeah. it’s a longer story but for these purposes a short version. i was running braniff airlines. i was a lawyer. richard was thinking about buying it because hit new tax laws to carry over which in those days you could use it for unrelated business. you could shelter everything else. in very richard style had this deal teed up where he was going to buy up vf where i was the owner of wrangler jean. it was too complicated for to it happen. richard asked me to come see him. i went over to richard’s office which was with the bass brothers on one of the upper floors of the only tall building in fort worth in those days. i walk in there and get ushered into richard’s office. richard is there. he’s got this big plate glass window in his office and it’s covered with a sheet. you can’t see out. so i said richard what’s going on here. he said let me show you. he peels the sheet back. there’s a view over this construction site down the block where the rest of the bass brhers with their money and some of richard’s are building two new office buildings, later referred to as darth vader at the o.k.corral. and richard said i can’t stand to see my money being put in this. you worked for robert, right? he worked for sid. what happened in that context was that the brothers split the business and richard had been running the business for all four brothers and it wound up with two-on-one side. i wanted to run the business with the other brothers bob and extend one of his other brothers. richard came to me and said hey you’re a lawyer you have no idea what you’re getting yourself into. i’ll tell you what, come sit in my office and watch what i do and you’ll learn. just show up any time, spend the day with me, whenever you want, come around. and so you walk in, i walk in, i spent three or four hours tched what richard did. some worked for me some didn’t. richard might be standing on a desk to make a point. you could never tell who you would find in the office. people who came through there, the last time you asked who came through. one of the people richard put into business rick scott the governor of florida. bush who was the president of the united states who richard hired to be effective at the base team. you can’t believe the people who came through fort worth which was the center. fort worth. fort worth. that was the center of the world at the time. nature versus nurture. did you guys already have it or he breathed it into you or is at it combination. you had it and then you learned? i think it’s a combination, for sure. i think that, you know, kids go to kentucky to play basketball, they go to duke, north carolina, they have these great programs so they attract great talent and then talent has to make of itself what it can. but i think barry said something earlier, richard made people believe in themselves more than they actually believed in themselves and i think it was contagious. you got to see and work around people. i was there when the baseball deal was put together. i was there when rick scott started. we started roughly at the same time. sort of out ofng came something. i think that richard — a big something. you felt great investing in westin. sears and other things are things he told you that he imbued you with that you think about today? the thing about disney at the time you have to have a point of view, you have to have a belief and see something other people don’t. a lot of times when you see something that other people don’t there’s nothing there. other times there’s something there. but is it worth it to invest your time and money? i think richard, the thing about natural gas, his view of natural gas and energy was persistent and he did very well. i was there during periods of time where energy and natural gas didn’t do well. and he never really waied. richard had a belief in his own ideas. i mean it’s watching somebody do something that you didn’t think was possible. richard created things out of thin air. there’s something else about you that i think richard would agree which is that you made very few, very large concentrated bets and been very patient. you talk about natural gas. he would sit for years in a position that was under water and he didn’t care. that was his style. richard’s style was 100% confidence in his ideas after he thought about them and as john scully made this point earlier, richard was able to do this with some data but not with what you would consider complete data. richard within an hour with barry and say barry you’re a money maker, i’m backing you. what are we buying because he thought barry would be good. he didn’t think barry would be good. but there’s a time — that was an example. but there’s a time to know. do you have examples of him getting out of something or did he change his thesis along the way? a couple of things i remember. he had an investment in ami. american medical international. it was a competitor to hca. i don’t know how that worked out. i think he did okay, not great. but it gave him an insight into the hospital industry which he had with hca and his relationship with rick scott. sometimes you make investments and if they don’t work out what you learn are applicable to other situations. he backed rick scott and then ultimately fired rick scott. yes. but, richard, again had the courage of his convictions. i just started to bork for bob on the other side of the business and i get a call from richard i want to you come down here. we were in the same building but on different floors. he considered to me to rick scott who he met 30 minutes previously and decided the best idea is a chain of hospitals and rick scott is the guy to do it. right. here he’s ready to go. he wants to know if i’m ready to join him and gives you 15 minutes to make up your mind. he was running his own money. don’t you think it’s quite different? richard was quite different in a whole lot of ways. but one in which he made this point often, you’ve seen this before, richard was in some sense a one man band. he was very insinstinctual. he doesn’t need armies of guys running numbers. he understands number. he didn’t say natural gas is at six going to four. he had a theory there would be an abundance or not an abundance it and he would stay a long time. did he look at a spreadsheet? no. but he had a yellow pad. what was on the pad? your phone number. i remember this when i first started in this business. i didn’t come from as a lawyer. i didn’t come from a numerically expert background. richard had the view if you couldn’t pencil it out on the back ofnvelope it wasn’t worth doing. it took spreadsheets and computer programs, et cetera, et cetera, i shouldn’t do it because if you couldn’t pencil it out in six lines on the back of an envelope, forget about it. what do you guys make of the world right now? can i ask you that while you’re here to get some, boehnerman and eddie lampert, we have to find out. what do you make of the globe right now? i’m waiting to see what eddie’s next idea is. pass it over to you. where are you? this economy. europe. everything. i’m sort of in a place where, i think risk is coming back into the markets. i think people are willing to put their money at risk. they want a return on money rather than a return of their money. you’re starting to see this. low interest rates are having an impact. people are tired of not making any money as the markets go up it sort of brings other people back into the markets. pension funds have a lot of money to put to work and a lot of need to earn returns. do you think the markets are ahead of themselves i don’t have a macro view. if you look at the my cross going back to ’08 alibi ’09 a lot of people were concerned about the debt coming due in 2012 and 2013. we’re working through that. there’s a lot of refinancing going on. so a lot of companies have been reliquified. i’m not a big regulation fan. when i think about was coming potentially with health care it’s hard to make sense for a large company with a large population of workers. what does it really mean? what will the rules be? how many different iterations will there be. that one certainty one way or another will be helpful in letting businesses move forward. put things off until june. we may know something in june. might know a little more. i would handle that question a little differently. i want to go back to the point that john scully made earlier. people are optimists. they can’t stay depressed for two years in a row. sneeps in the u.s. the glass becomes half full even if it’s half empty. it’s the nature of human beings. so where are we? no human beings. i’m with you. so, where are we? , the economy is better than you think there is. there’s mixed signals. there’s this and that. people are starting to expand. you look at the numbers. they are actually not that bad. last quarter was better than you thought. 3% growth or something like that. is not in trouble in the short term. long term may be another story. europe? much less than what meets the eye. it won’t fall off the edge of the world. they will get beyond this business of people being silly enough thinking that the italy’s iou is the same as germany’s iou. beyond that what will happen to the eurozone is nothing. it will look like it does now five years from now. greek will be there. europe is the high cost of everything. you don’t have a lot of business there’s but it’s not falling off the end of the world and spaghetti is the best in europe. what about asia? asia is the long term winner in this game but highly volatile and a difficult place to invest. eddie would you invest in anything? we do — most of our investments are in the united states. but, you know, i think back 20 years when investing outside of the united states, the accounting standards were unclear. the idea of actually creating shareholder value was less pervasive and i think the accounting is much more transparent and the attitudes have changed. but i think that we’re sort of going in the wrong direction from a regulation standpoint. a lot of the rest of the world is actually more regulated but moving in that right direction. that will unleash a lot of potential. if richard was going to start investing today, where would he do it? i want to steer this nversation back to richard because that’s really why we’re here and this is what this is about because richard is a legendary investor in so many ways. but richard, i want to have people leave with the understanding that richard is a world class character. in addition to being a great investor. i remember they had just done the disney deal which was swapping down this broken down developer which turned out the be worth $14 billion at its high. best deal done by anybody. right after that richard is going san diego to meet with the head of the then mason computer company which he thought about making an investment in. he didn’t phone us. he took all his clothes in a paper bag. and he tells this guy who is the ceo of the company he’s going to meet at baggage claim and he’ll be the guy carrying a paper bag. richard shows up to negotiate this multimillion dollar deal carrying his toothpaste and socks and underwear in a paper bag which he got from the safeway. wow. he’s a character. you negotiate ad deal with this guy, moved the headquarters from california to utah and made a ton of money. we should also talk about where richard is right now, and part of the reason that you are all trying to raise awareness at this point too. he’s been diagnosed with degenerative disease. richard has a degenerative disease called psp, one of these things very hard to diagnose. they are not sure it’s the right diagnose. for lay people it’s a cross between lou gehrig’s disease and parkinson. they are also trying to find a way to fight alzheimer’s and dementia. dan stearn will be very knowledge able on this issue. like all these diseas won’t be curable in somebody’s lifetime. he met with him a day or two days ago. and working on where the protein is impacting this particular disease. exactly. i just want to ask, off topic. i have to ask you this one other thing and this is about retail in general. there are some that say sears could be a best buy. great. who wants to be a best buy when i see that’s the shopping place for amazon. i wonder about all retail in general given what would rainwater think of the future of bricks and mortar given the way — how do you think about it? you have these long term things. does it ever — do you ever look at the world and say oh, my god my long term thing is eight years ago and now the world is different in. the world is very different. two end of the spectrum. there’s the disney end of the spectrum which is great, iconic american company. but the world has changed. and the question is george will wrote an interesting editorial. he wrote sears as an example. leading retailer probably in the world and all of a sudden walmart came along and look what happened to sears. i think companies especially in retail are finding themselves in the need of reinvention. penney in the need of reinvention. sears in the need of reinvention. best buy in need of reinvention. and that means that you’re going to have to try new things and if you’re unwilling to try new things and to fail and learn, you don’t have a shot. that doesn’t mean you’re is going to be successful but you have to try to change. i think the same thing is happening in the media, the media business. you know, this integration of, you know, whether it’s television, print media, online, mobile, people are trying to figure it out. it’s helpful to figure it out while you’re making a lot of money. if you’re not making a lot of money your openings become much more limited. but the things we’ve been working on over the last five years, for example at sears, those things are now — at least those ideas are becoming more obvious and moarent and observers. the hard part is executing. walmart is experimenting with smaller stores. you have virtual stores in the uk, tesco has stores that literally are . you pick online and they will ship them to your home. there are stores — not set up, set up more like distribution centers. so companies as established as walmart and tesco are finding a need to experiment. you’re seeing in the media — i look at both business, retail and media, both in the process of reinvention and they are going to be winners and losers and i think that certain things that seem obvious aren’t obvious, and, you know, from my standpoint i look at a company like an autozone or auto n both in retail much different businesses, much more stable, much less impacted by the internet and what’s going on. you look at a company like auto nation two, three, four years ago, $4 oil was the dem or decline of the auto industry. now it’s driving behavior that’s actually positive. did you see mike yesterday? i didn’t see him but i heard. i’ll send you a transcript. you know, people are adaptable. companies are adaptable. you either adapt or die. so two or three years, $4 oil it’s a completely different perspective and it was obvious before is not obvious now. i think retail — i think it’s going to be great and it has been great for the american consumer. the question is it good for business? i think a lot of businesses will have profitless prosperity and we got to adopt and i think the companies like amazon, e-bay, they’ve made — they turned this into a big opportunity and we got to be able to compete with them not just walmart and target, et cetera. does that mean you’ll go more towards this idea to have these stores become distribution centers and do more online? we’re really focused more working customer back and i think that’s where information and i think who owns the relationship with customers generally viewers, you know, that create as platform. and, you know, i remember when — i started in 1984. i don’t think cnbc existed then. now this is an incredibly important source of news and information. so, i think, i think that, that a lot of companies like whether it’s disney, ibm, et cetera that were recreated, something inherent in those companies that you can build on. and i’ve made investments in companies whether it’s an autozone or autonation or a sears where there’s something to build on. the question is how well do we execute. going back to your retail point what’s changed dramatically by the internet is distribution methods. what hasn’t changed is the valve brands. in fact, there’s a bigger differential now because if you crew, let’s say, and you can only buy j. crew merchandise from j. crew — we don’t have an ownership interest there — but the point is you’re in one -position. penney and selling other people’s brands you’re in a different position because that person who controls the brand may choose to distribute in many different ways in clueding over the internet. or federated or macy’s. guys are buying brands. if you don’t have a brand and dependent on somebody else’s brand you’re — i see the same thing in media too. content of a brand and distribution. interesting. i was thinking as you were talking. i’m not aware of richard making any international investments of scale in his career. i’m wondering given our $15 trillion deficit, do you think richard would be looking offshore today? would he be saying i want to get out of the dollar and put 90% of his net worth in another currency? you’re definitely right that richard was not international. you think of when richard and sid and scully and all the guys, stock pickers got started, these guys are all class of 1969, graduated from stamfotd business school. in 1969 nobody was aggressively investing abroad. there was no liquidity. there was no rules. no sec. people weren’t investing in those. richard i would suspect be investing in coal mines in mongolia. i do think another lesson from richard which is an important lesson is, you know, invest with what you’re familiar with. invest with what you’re comfortable with. because the opportunities are in russia or china or india, he’s not going to run there. ‘ll to the opportunities that he’ll be looking for where there’s disruption. but something that he could sort of, he feels comfortable with. he understood his capabilities. i used to say tennis and golf, he wanted to be in business with guys top two or three. they make all the money. everyone else, you know, sort of struggles along and that’s what richard wanted to do. he wanted to get into business with great people and i think that was a lesson of how important people are to making businesses work. and i think richard sort of, you know — i think the farthest international trip richard made from fort worth was new york. when you started with richard the private equity business was a private business. you didn’t have these publicly trade entities. maybe you’ve talked with richard since. what does he think about these firms going public. these hedge funds. not going public. richard’s view of life was if yon the businesshat richard saw himself being in as being a guy who did investments and did deals, if you will, what you didn’t want is to have a big overhead and a whole bunch of people you had to feed. what you wanted to do was have some smart guy like eddie or barry show up with some idea where you could put money in. if barry failed barry would be living on the street because he didn’t get any money. there was a richard rainwater model which was don’t raise a fund, don’t set up the business, you’ll money if the deal seeing right. you’ll find the money. as opposed to getting 20% you can get 80%. own the whole thing it’s your capital. does that mean your colleagues that run publicly traded versions of what you do are good investments or bad investments? well, that is a complicated question. the market has not figured out,000 value these businesses. if you look at the guys who have gone public whether it’s a blackstone or something other they are valued differently. they are valued on numbers you can’t understand. the structures are very complicated. richard would have hated that as an investor. that doesn’t mean they are not good in this market but richard himself would never have invested in something where you had to read a 400 page prospectus to figure out who fwets what. it’s been great. i would ask you back. like some of the other questions that might not get answered. thanks for coming on. i know it’s a unique situation why you’re here today. well we appreciate you putting us on for richard. we’re here because of the respect we all have for richard. still good to have you on. it’s been extraordinary. thank you. barry stearn is comfortable here and he’ll show you he likes coming on and both of these guys are great as guests hosts. we hope to see you back. we’re going to do it. we got some headlines. if you’re just waking up this

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