When stocks are soaring and sports bloggers like Dave Portnoy of Barstool Sports and talking about how easy it is to make money in the stock market, it might be time to worry. Dan opens this week’s episode by reminding listeners, “this is exactly what it sounds like at the top.”
Then on this week’s interview, Dan welcomes guest William Cohan on to the show. Will started his career as an investigative reporter for the Raleigh Times before eventually setting his sights on Wall Street. He quickly began a successful career as a mergers and acquisitions banker, eventually becoming a managing director at JPMorgan Chase.
Will and Dan discuss a wide range of topics including Will’s latest book, The Last Tycoons: The Secret History of Lazard Frères & Co. Will says, “That’s why I wanted to write this book… to share with people what it was like to work at this firm, which had this soaring reputation and was filled with, as you pointed out directly, Great Men but was utterly dysfunctional, utterly chaotic.” Will gives Dan all of the fascinating details about what goes on behind the scenes at some of Wall Street’s biggest firms.
And finally on the mailbag, one listener asks Dan… if inflation occurs and interest rates rise, could we see a period where real estate prices suffer? And another listener asks some in depth questions about asset swaps at the Fed.
Dan gives the listener a long and detailed answer here on this week’s episode.
William D. Cohan
William D. Cohan, a former senior Wall Street M&A investment banker for 17 years at Lazard Frères & Co., Merrill Lynch and JPMorganChase, is the New York Times bestselling author of three non-fiction narratives about Wall Street: Money and Power: How Goldman Sachs Came to Rule the World; House of Cards: A Tale of Hubris and Wretched Excess on Wall Street; and, The Last Tycoons: The Secret History of Lazard Frères & Co., the winner of the 2007 FT/Goldman Sachs Business Book of the Year Award. His book, The Price of Silence, about the Duke lacrosse scandal was published in April 2014 and was also a New York Times bestseller. His new book, Why Wall Street Matters, was published by Random House in February 2017. He is a special correspondent at Vanity Fair and a columnist for the DealBook section of the New York Times. He also writes for The Financial Times, The New York Times, Bloomberg BusinessWeek, The Atlantic, The Nation, Fortune, and Politico. He previously wrote a bi-weekly opinion column for The New York Times and an opinion column for BloombergView. He also appears regularly on CNN, on Bloomberg TV, where he is a contributing editor, on MSNBC and the BBC-TV. He has also appeared three times as a guest on the Daily Show, with Jon Stewart, The NewsHour, The Charlie Rose Show, The Tavis Smiley Show, and CBS This Morning as well as on numerous NPR, BBC and Bloomberg radio programs.
He is a graduate of Phillips Academy, Duke University, Columbia University School of Journalism and the Columbia University Graduate School of Business. He grew up in Worcester, Massachusetts and now lives in New York City with his wife and two sons.
NOTES & LINKS
1:21 – When the president of a popular sports blog declares, “There’s nobody who can argue that Warren Buffett is better at the stock market than I am right now. I’m better than he is. That’s a fact.” we could be nearing a top…
9:25 – If stocks, bonds, and precious metals are all rising together, which one gives first?
15:54 – Dan has a conversation with this week’s guest, William Cohan, who started his career as an award winning investigative reporter for the Raleigh Times. He later set his sights on Wall Street where he had a successful career as a mergers and acquisitions banker, eventually becoming a managing director at JPMorgan Chase.
20:36 – Will shares the story of how he started on Wall Street… “so I joined this group in New York, started trying to do my job, had no idea what I was doing… that was September of ’87 and then in October of ’87…”
26:24 – Dan praises Will’s latest book The Last Tycoons: The Secret History of Lazard Frères & Co… “…I’m telling ya, I got into the first two chapters of this and I was like wow… It’s an opera, it’s a grand story with murder, and rape, and war and scandal…”
35:06 – Will shares some incredible stories of the Great Men he worked under during his time at Lazard Frères.
41:48 – “That’s why I wanted to write this book… to share with people what it was like to work at this firm, which had this soaring reputation and was filled with, as you pointed out directly, Great Men but was utterly dysfunctional, utterly chaotic.”
44:30 – Dan asks Will about his deeply personal book, Four Friends… “Unfortunately they all died young and tragically, so this was my way of remembering them, paying homage to them, and in some way figuring out what happened to them…”
54:20 – Will shares a short quote with the listeners to sum up what his life has become about… “you could put [this quote] on my grave and I’d be happy…”
59:10 – On this week’s episode of the mailbag… if inflation occurs and investors demand higher interest rates, could we see a period where real estate prices are destroyed? And are people missing the big picture when it comes to the Fed’s asset swaps?
Announcer: Broadcasting from the Investor Hour studios and all around the world, you're listening to the Stansberry Investor Hour. Tune in each Thursday on iTunes, Google Play and everywhere you find podcasts for the latest episodes of the Stansberry Investor Hour. Sign up for the free show archive at investorhour.com. Here's your host, Dan Ferris.
Dan Ferris: Hello, and welcome to the Stansberry Investor Hour. I'm your host, Dan Ferris. I'm also the editor of Extreme Value, published by Stansberry Research. Today we'll talk with William Cohan. Cohan is the author of several books. Today we'll talk The Last Tycoons: The Secret History of Lazard Frères & Co., where he spent several years of his career. Huge high drama. It's really cool. You'll want to stick around for it. This week in the mailbag, not a lot. Just two questions – one about real estate and another one about the Federal Reserve and inflation. In my opening rant this week, we'll talk about stocks, bonds, gold, silver, volatility, and the man who controls the stock market. That and more right now on the Stansberry Investor Hour.
I control the stock market. No, I don't control the stock market. That's what Dave Portnoy, this guy who apparently sold Barstool Sports, a sports website. I don't even know what it does. I don't go there. I'm not a big sports guy. But he sold this thing for $400 million and he now fancies himself a stock market guru. He says he's making $50,000... $100,000 a day in the market. He says stocks always go up, short sellers should be investigated by the SEC. I mean, he's like – he's such a sign of the top. I can only direct you to his Twitter feed. Dave Portnoy. Check it out. But he tweeted earlier this week. He's always saying things like, "I got the stock market in my back pocket. I got this stuff. I'm better at this than Warren Buffett." All of this kind of stuff. And this time he says, "I control the stock market." Now, obviously Dave Portnoy does not control the stock market. It's just a further sign – it's things people say at the top. Now, you'll never catch me calling a top, but these are things that people say at the top. This is the kind of stuff that happens when markets just go up and up and up. And as I'm talking to you, what's going up? Well, stocks, bonds, metals and volatility, everything. It's all going up as I'm talking to you. You've probably seen the moves in silver. Talk about that in a minute.
But first, let's talk about the S&P 500 versus the 10-year Treasury bond. I think this is probably going to wind up being a somewhat important relationship. I mean, it is an important relationship, right? When bonds stink, stocks get more attractive. So when the 10-year is yielding well below 1%, around 0.6% recently, then the yield on stocks is, like – I think it's like five times that now. So, well, that looks a lot more attractive, doesn't it? But what are you really saying when you say that? What are you really saying when you say, well, stocks are really, really attractive versus bonds? What you're really saying is that bonds stink but stocks don't stink as much. That really is what you're saying. And in fact, right now, stocks are priced for a decade of flat to slightly negative annualized returns. So to say that they're more attractive than bonds isn't saying a lot.
And there's another relationship. We have to give a hat tip to Mike Green at Logica funds, who is like – he's like one of the up and coming, really intellectual guys in the finance world. I understand about 50% of what he says, but I find all of it fascinating and some of it very insightful. He's worried about things like passive investing getting too much share of the total float in the stock market. And for example, he pointed out, you know, we talked with Greg Zuckerman on the program several episodes back, really good. He was talking about – we talked about his book about Jim Simons and the folks and Renaissance, this incredible quant firm, and Mike Green was saying, you know, one of the things at Renaissance, one of the hardest things that they have to deal with is dealing and quantifying their own effect on the trades they're doing. So as they put money to work in the trades that they find, they affect the market for those securities and those assets, and then that has to feed back into their computer programs, right? And that's the hard – one of the very, very hard parts for them. And they have, like, a few tens of billions under management. I think the whole thing, it was like $50 billion or $70 billion or something like that. I don't even know. Under $100 billion, right?
So Mike Green was saying in this one interview I saw, he says, well, what about Vanguard and BlackRock? They have trillions under management, several trillion between the two of them. I mean, even if it's a few trillion, it's trillions, right? Yeah, a trillion here, a trillion there, pretty soon you're talking real money. So what happens if that has to unwind? And he offered to debate them on a podcast. He said I'll debate anybody at Vanguard or BlackRock about how they unwind if they need to sell, what happens. And he says they're never going to do it because, you know, there's nothing in it for them. But one of the things that he pointed out was, as the tenure yield falls, meaning the price of bonds rises, the collateral becomes more valuable. People use these things as collateral to do levered trades. So as the collateral becomes more value, what do you do? Well, your algorithms and things say we need to lever up more. Because the collateral's worth more, we need to borrow more and buy more. But what happens when you're no longer getting a positive yield from your 10-year bonds that you're holding? What if it goes to zero and negative? Well, then you're paying to own these bonds, and you don't want to do that, so maybe it starts unwinding.
I'm not saying these things are going to crash the stock market or anything, but they could be good for a correction and, you know, stuff's been going straight up lately, so I tend to worry about that. When you see markets just all going straight up together, I think it's wise, it's sensible to become a little concerned. It doesn't mean you run out and sell everything, but just take the case of, you know, so stocks and bonds are – you know, one's crappy, the other one's slightly less crappy, so yeah. And then we have gold and silver that have been doing real well lately, especially silver. I've talked about Mark Putrino before. He's one of these guys in Stansberry who worked for – he worked for Steve Cohen. We have all these people who worked for, like, Cohen and Soros and, you know, Goldman Sachs and all this stuff. It's really cool. And he's thinking that silver needs to take a break because it's just kind of gone straight up, and that makes sense. And other traders are saying, you know, other folks that I sort of listen to are saying the more this goes straight up, the bigger the correction's going to be. Also makes sense.
But I heard fellow. God, I forget who it was now. I'm so sorry. I wish I could give him credit. But he suggested that, look, the higher silver goes, the bigger the correction, but when we get this correction, it's going to be the last great buying opportunity. And we've interviewed Rick Rule on the program before, and one of the things that he'll tell you is, you know, at a certain point – and I think we may be at that point. I'm not saying he says this. I'm adopting his little saying. At some point, Rick will tend to say, "Okay, the easy money's been made – the big money has yet to be made." And that's how I perceive these trader guys telling me that silver's going to correct, and when it does, that's your last big chance to get in. Because all the deep-value types, you know, they were getting in in 2016 and just – they'll get in when nobody wants to own the stuff, and they'll stick around for a long time. But, you know, the less sophisticated folks, they wait and they wait and they wait, and then when, you know, you're going to get this one last dip in probably gold and silver – and the equities too, gold and silver equities as well – and that'll be like your last big chance to get this stuff to hold on for really big money, maybe. You know, I don't predict. It just makes sense to me, and I'm certainly not selling. I'm not selling physical gold, not selling physical silver, period. I did own some little near-term, at-the-money call options on, you know, like SLV, GLD, that kind of stuff, just very small amounts of money. But I'm out of that now. I'm just waiting to see if we get a correction here, and I think we probably will.
Another fellow on Twitter who I really like, Mike Harris, the way he framed it was he said, "Look, stocks, bonds, metals, all straight-up together... something's got to give here." And what that means is bonds and certainly over the last few decades, you know, bonds have been the hedge. You own some bonds for when your stocks aren’t performing. They correlate negatively. And same with gold and silver. You own them as a hedge if things go bad in the economy, they go bad in the stock market, you get the picture. So having all of them go up together makes you wonder, makes this fellow, Mike Harris, who I really like on Twitter, wonder, and I agree. Which one of them is going to give? All of them? Is the stock market going to give out? And we'll continue to see strength in bonds and metals? Or will the metals correct and, you know, stocks will be okay and the metals will correct, and then you'll get that last great buying opportunity. It's interesting for traders – for short-term trader types right now, it's a bit of an interesting puzzle, I think, in the market.
And you see volatility up too as I'm speaking to you. So what is that? Well, that's people buying put options on the S&P 500, right? So they're hedging that – those gains that they're seeing in stocks. Personally, I'm a longer-term guy. In my Extreme Value newsletter, I think our average holding period is around – it was right around 1,100 days. I usually check it daily, and right now it's – oh, it's 1,000 days, yeah. Little over 1,000 days. So that's not like what's going to happen next week or next months, right? That's next couple years. And we have positions that we've had in there, we're still holding stocks we recommended in – one of them 2008, 2009, a couple names. So you know, longer-term, that's a different discussion. But right at this moment, it's a little weird. And when you have folks like Dave Portnoy saying, "I control the stock market," you know, it just makes me feel like stocks are overdone, whether that's short term or whether we get – you know, finally get the longer term, you know, real bear market that I would think would be around here somewhere remains to be seen.
And you know, there's a lot of good arguments for saying that we won't get that, but look, if you look at the history of the S&P 500, of the stock market in the United States, there's very few times when it's gotten this expensive, you know, like 2.3, headed toward 2.4 times sales. And that's a better gauge than price to earnings, by the way, than P/E. Price to sales is better. It's been more reliable over time. And you know, when it gets up around here, as it's done very few times, you know, it tends to be kind of a big – big top.
And what if we do this? What if all that happens over the next, I don't know, you tell me, five years, what if all that happens is we get these events like we got in March, where all of a sudden the market's down 30% in a couple weeks? It would make sense to me that, from this point on, you know, we had this regime of really low volatility, and that appears to be gone. Haven't seen the VIX much below – haven't seen it below 20 in quite a while. And it's been – you know, when it starts to get up around 30, I know the fellow at Hedgeye, Keith McCullough, says at 40, the market becomes uninvestable because it's just so volatile and crazy. It gets worse, you know, when you get up around 20, 30. It gets more difficult to own stocks and to buy new ones. So, you know, for most people, right? I mean, if value gets created, fine. I don't care about the volatility. I want volatility. I want a big drawdown. But you know how people are. They're in, they're out, they get scared, the market's down 20%, they sell everything. Oh, then the market rallies 40%. Oh, then they get back in after the rally. You know how it is. So it wouldn't surprise me at all to see lots of this kind of volatility and these events over the next several years. And if all that happens is that for the next five or, I don't know, several years, that will be unpleasant enough, and I think it will make – in the end, it will hopefully make stocks cheap enough to be really super attractive again.
I'm going to leave you there. It's a weird moment. What happens next is anybody's guess. I'm guessing silver has got to correct, but I also think stocks have gotten ahead of themselves. Like I said, I don't know. This is why you hold a diversified portfolio: cash, stocks, metals, little bit of bitcoin, and your cash will take care of you if all this stuff starts correcting or something, right?
Okay, now let's talk to William Cohan. I have to tell you I have, like, several of his books on my shelf. They're all pretty long. He goes into great depth, but as we'll talk during the interview, you'll hear the sense of drama is awesome. I mean, if you can make a financial book into a really great drama, you just want it – you want it to go on for 500 pages. And he does, and it's really – you know, it's great. He's, like, one of the great financial writers of our time in that respect. So let's talk to him right now.
He predicted the downfall of General Motors and the collapse of Fannie Mae and Freddie Mac in 2008. Our founder and my friend, Porter Stansberry, recently told me he has a very critical warning that investors need to hear. Porter is holding an urgent crisis briefing next Thursday at 10:00 a.m., Eastern. In this briefing, Porter will explain why he believes capitalism as we know it is in a crisis. What Porter has found will have an effect on millions of Americans and their portfolios. Go to www.crisismessage.com to sign up for Porter's urgent crisis briefing on July 30th at 10:00 a.m., Eastern. Again, that's www.crisismessage.com.
Today's guest is William Cohan. William Cohan was an award-winning investigative journalist before embarking on a 17-year career as an investment banker on Wall Street. He spent six years at Lazard Frères in New York, and later became a managing director at JPMorgan Chase & Co. He is a graduate of Duke University and received both an MS from Columbia University's Graduate School of Journalism and an MBA from its Graduate School of Business. He lives in New York City, in Columbia County, New York. Bill Cohan, welcome to the program, sir.
William Cohan: Thank you. Thank you for having me.
Dan Ferris: So, Bill, before we get to talking about the absolutely wonderful books that you've written, I'd just like to know, at what point in your life, how early on in life did the financial world sort of beckon you? When did you know that the financial world was for you?
William Cohan: Well, first thought that the journalistic world was for me, and it turned out – I mean, it turned out to be that case, and also the financial world beckoned me, so it was like two strands of DNA that got intertwined together. You know, when I was in high school, I was the business manager of the school newspaper and, you know, we made more money than ever before, and that sort of seemed fun and interesting. My father was an accountant and my uncle was an accountant, my grandfather was an accountant and I used to go down to their office on Saturday during tax season, and they had these big adding machines that I used to love to play with. You know, they're the absolutely opposite of a small little calculator or a little computer. They were these big, lumbering machines, and I used to love to push the buttons and watch them, like, spew out all sorts of big numbers. But it was probably I got interested in the financial markets when I was traveling with my parents in Japan in the early 1970s. We were on a bullet train, and I was reading a book that Merrill Lynch – a propaganda book that Merrill Lynch put out about how to buy stocks. And not that I did anything about that, but that was sort of the first inkling that I had that it was something about the financial markets and the financial world that interested me.
Dan Ferris: Was it all the doggone money?
William Cohan: No. I wasn't really – and I'm still not sort of driven by financial rewards. Maybe it was – I mean, I remember as I was growing up a little bit more, becoming a teenager and in my early 20s, I was always really interested in reading about deals that would be announced and then they would appear – you know, sort of the big deal would get announced, there's a lot of commotion about it, you know, and this was a time before there was Bloomberg TV or CNBC or Fox Business or anything like that. And you'd wait a day or two and then the Wall Street Journal would have a big takeout when it was owned by the Bancroft family, before Rupert Murdock bought it, and there's be this big explanation and story and narrative about how the deal had occurred and who did what to whom and who the bankers were, and I always used to love to read those things, and then started dreaming about the possibility of writing those things myself. So it wasn't money. It was more the drama of it all, you know, how these deals happened and the mind-boggling numbers involved in terms of the billions of dollars that these deals involved, and you know, I just first sort of dreamed about writing about it, and then, you know, while I was at business school later, I sort of dreamed about working on them. And then, of course, I ended up working on them and then writing about them, so everything came true.
Dan Ferris: So, tell me about your – you had this 17-year career on Wall Street as an investment banker. Tell me about your first gig. How did you get that, and I'm just curious how old were you and what did it look like coming in the door to wherever it was that you first worked?
William Cohan: So I graduated from Columbia Journalism School in 1983 and then went to work at a paper in Raleigh, North Carolina, from 1983 to 1985 covering public schools in Wake County, North Carolina. I'd never been to a public school in my life, so it was sort of an interesting opportunity, challenge. Learned a lot about public education. Was making a tiny amount of money as a journalist, embarrassingly small, and my father kept wondering how it is I'm going to be able to make a life for myself, afford to live based on being a journalist. And so he always wanted me to go to business school, and I thought – well, I didn't want to go to business school. I didn't even know what business school was about, but over time I decided, well, maybe if I went to business school, I could get a job writing those articles in the Wall Street Journal that I always wanted to do.
And so I went to – back to New York, back to Columbia Business School, kept trying to get a job at the Wall Street Journal. They would never hire me. To this day, they've never published anything I've written and pretty much only written bad reviews of my books. I'm not sure why any of that's the case, but eventually I decided, okay, the heck with trying to be a journalist anymore, writing about M&A deals. I'm going to – you know, I sort of got caught up in the gestalt of business school and everybody wanting to go to Wall Street. So in May of '87 when I graduated from business school, all you had to do to get a job on Wall Street was breathe. And of course missed all of the opportunities to work at Wall Street investment banks or had gotten rejected from them because I had a quirky journalist background, not a – you know, and had been a history major and wasn't finance or accounting person by my DNA.
And I ended up getting a job offer to go work at GE Capital in New York, financing leveraged buyouts. So you know, the pay was much more than I had gotten paid as a journalist. I didn't know anything about it. I didn't know what a leveraged buyout was. I certainly didn't know how to finance a leveraged buyout. So I joined this group in New York and just started to try to do my job. Had no idea what I was doing, and that was in September of '87, and then in October of 1987, of course, the market crashed 22.6% in one day. I saw, you know, grown men standing around the Quotetron machines in those days crying because they – you know, their life savings had been hurt very badly. Of course, I had no life savings, so it didn't affect me and, you know, just tried to do my job and eventually, through trial and error, through osmosis, through apprenticeships, through whatever means one – it takes one to learn what is really an apprenticeship business, Wall Street and M&A advice and, you know, I eventually learned that job, got hired at Lazard in 1989 as an M&A banker. I was the only associate hired that year, and I really thought I'd died and gone to heaven.
I mean, I thought, "My god, how did this guy with no background – how did this guy who survived the Wall Street financial crash of 1987, when all of my classmates who went to Wall Street investment banks got flushed out as a result of that and I survived, and now here I am at Lazard?" I mean, it was like the pinnacle of M&A banking on Wall Street at that time and, you know, I just thought it was infinitely fascinating. But I hasten to add that, though I ended up writing my first book about Lazard, I had no inkling at that time that I was going to do that or I was ever going to go back to writing, so that all came much, much later. But I knew that I was in a very unusual, special place, even though it was a very difficult place to work and completely dysfunctional most of the time.
Dan Ferris: Right. So I've read a fair chunk of the book that you're talking about, The Last Tycoons: The Secret History of Lazard Frères & Co., which I have to say I can't imagine anyone reviewing that thing poorly. I hope the Wall Street Journal didn't pan that book. Did they?
William Cohan: Yes, they did. Yes.
Dan Ferris: You've got to be kidding me.
William Cohan: The person who panned it has since told me that he apologized. I think he was – they had asked an investment banker to review it, and he didn't like it. I think had just come out with his own book, and has since apologized, so there you go. But it did win – it was named the – that same year in 2007, it was named the Financial Times Goldman Sachs Business Book of the Year, which made it the best business book – by one measure anyway – in the world in 2007. So things worked out, I guess.
Dan Ferris: That's easy for me to believe. That's easy for me to believe because I'm telling you, Bill, I read – I got into the first two chapters of this, and I was, like, wow. It's an opera. It's a grand story with murder and rape and war and scandal and – and the inner workings of this incredible firm. I highly recommend it to anyone. I can't imagine anyone panning it for any reason, even the ones you describe.
So I'd actually like to talk about that a little bit with you, that book, if we may. It's really interesting to me. The first chapter's called "Great Men," and you just start using this term Great Men. And you know, it's easy to pick up the context of what you mean, but I had never – I don't think I've ever heard this term used in this context. Where did this term come from? Why do you use it? And if you've had any involvement in your career with Great Men, I certainly want to hear about that too, but where did the term come from?
William Cohan: Well, it was just a term that, believe it or not, people used to describe the bankers at Lazard. They thought of themselves as Great Men, as time when giants roamed the earth, and they thought they were among the giants that roamed the earth, whether you're talking about André Meyer or Felix Rohatyn, who just passed away, or Michel David-Weill, who owned the firm, you know, these people were essentially so imbued with their own wonderfulness that they thought that they were special, that the advice that they were giving their corporate clients was unparalleled, and that they deserved the very high fees that they received for doing that work, and they deserved to live the lavish way that they were living, which included, you know, big apartments on Fifth Avenue and Park Avenue in New York and, you know, big houses in the Hamptons or in Litchfield County, Connecticut. So they all had drunk their own Kool-Aid, so to speak.
And so the thought of Great Men, I was just being reportorial about the way they thought of themselves, you know, and I – don't forget, I spent six years there, so I had a front-row seat on it all. Again, I want to be clear I wasn't taking notes. I never thought I was going to be writing a book at all, let alone one about Lazard. That came, as I said, much later, but you know, one could not help but pick up this feeling of specialness, of Lazard exceptionalism that sort of pervaded the place. Well, you know, whether – most of it, of course, was a pathetic myth, but you know, they believed it.
Dan Ferris: So this was Felix Rohatyn's tenure as the leader when you were there? Is that right?
William Cohan: Well, by the time – you know, when I got there in 1989 to 1995, Felix was at the height of his powers. He never wanted to run the firm, so he didn't run the firm. He just wanted to do deals. You know, at various points, he was bringing in, like, 80% of the revenue each year, and so he was the most powerful partner at the firm, but he didn't want to get involved in the day-to-day running of the firm, the day-to-day managing of anybody. He just wanted to do his thing, get people to jump at his command, which he was very good at, and you know, sort of do whatever he wanted to do whenever he wanted to do it. And so, in effect, he was the firm and he was the most important partner at the firm.
Dan Ferris: Yeah, it's interesting that you tell me that, you know, he didn't want to run the firm because there's an odd, almost comical scene in the book with a guy named Kim Fennebresque, and he's asked to take co-management of the banking group, and he's in turmoil about it because at this firm, being asked to go into management is not the wonderful thing that you would hope it would be. He sees it as a dead end. And I found that so odd. That is atypical, right? That's a weird aspect of Lazard, right?
William Cohan: At that time, yes, it was. Basically on the rest of Wall Street, of course, if you go into management, that just means more power and more pay. Lazard, which at that time was a private partnership, which was, as I said, controlled by Michel David-Weill, the French fourth-generation heir to the family that started the firm, that you know, he sort of made all the money decisions. Then there were other – about what everybody got paid – and then there were other people who sort of ran the firm on a day-to-day basis, which – meaning who dealing with associates and vice presidents and things like that, and HR departments. But if you were the real power at the firm, then what you did was you just did deals and got other people to work for you and you had other people to jump at your command, and that's, you know, of course that's what Felix did, and Kim realized that basically he was just going to be a bureaucrat and, you know, and the thankless tasks because Felix was going to still be the most important partner and Michel was going to be the one who made all the decisions about pay and promotions. So at Lazard, that became a very thankless task, and he was smart enough and funny enough to recognize it.
Dan Ferris: So, Bill, what did you do during your time there?
William Cohan: I started as an associate. You know, as I said, I was the only one hired that year, and they didn't really have any kind of training program. They barely had an HR function. I sat in an office for three months without doing anything because basically nobody knew I was there. Then an associate who was a peer of mine went on vacation, and the partners on the deal that he was working on, you know, basically didn't like him and thought they would use this opportunity of him going on vacation to replace him with me, and so that's how I started working at Lazard. It happened to be a big restructuring deal of advising on the restructuring of something called Revco Drugstores, which was a big drugstore chain in the U.S. that had been taken private by a private-equity affiliate of Solomon Brothers and then went bankrupt. It was the biggest – well, one of the biggest bankruptcies ever at that time, and Lazard had been hired to advise on the restructuring of the company, which is of course a very labor-intensive, long-time project where you get paid every month a fair amount of money.
And so, you know, I did that and worked on other restructuring deals for two or three years. And then Michel decided to blow up the restructuring group, to disband it, which was of course a big mistake, and then he brought it back together later. But then I was sort of thrown into the general M&A pool as an M&A banker and worked on all sorts of things for the next three years until basically it being so dysfunctional and such a difficult work environment that when I got talked to by a recruiter hiring people at Merrill Lynch – for the Merrill Lynch's M&A group, I decided to go there. And the saga continued.
Dan Ferris: Right. So did you have any personal brushes with any of these great men, David-Weill or Felix Rohatyn or even like Steve Rattner or anybody like that?
William Cohan: Absolutely, on nearly a daily basis. One of my favorite stories, and I think I tell this in the book, even though I definitely tried to keep myself out of it as much as possible, was once when I'd been there six years and was invited to a meeting with a client, and I was a senior vice president at this time, and the meeting was with Felix and a couple of other partners. So Felix really wasn't part of the deal team, but the client wanted to sort of hear the Great Man Felix pontificate about, you know, the economy or interest rates or things like that, which of course Felix loved to do. And so he came into the meeting and he pontificated for about 15 minutes and then the client asked Felix to introduce his team. And I could tell immediately that Felix was stricken because he knew that he was going to have to try to introduce me, but he had no idea who I was, even though I'd been there six years and it was an exceedingly small firm. There were about 75 partners and 75 non-partners and you know, I'd been there six years and we had worked together on things. Anyway, he did not know my name and someone else had to jump in and say who I was. So I had a big laugh to myself about that. I certainly wasn't going to help him out, that's for sure. It was more fun for me to see whether he was going to have to fall on his sword and how he was going to get out of the predicament he found himself in. But you know, I – of course, you know, Steve Rattner was my boss. I worked with him on several deals and, of course, you know, in the writing of this book, I of course spent many, many hours with all of these people, many years later obviously.
Dan Ferris: Wow, very cool. You know, you mentioned – and that is a funny story about the guy not knowing your name after six years. And it reminds me of the story in Chapter 12 of the book where you talk about this tree that grows in Indonesia that basically, you know, this I assume somewhat beautiful tree that kills everything around it. and the whole chapter is – or a good part of the chapter is about Felix Rohatyn and how he just kind of used up and sort of consumed the people under him. Like, he wasn't carrying anyone along. He was kind of using them up, and working for him was kind of a dead end, wasn't it?
William Cohan: Well, I will say that there were many people who felt that way. There were many people who Felix would bring into his orbit, and so they would feel like the warmth of a thousand suns on them as Felix was showering them with his presence. And before they were used up, they felt very important and that, you know, Felix would include them because he was – Felix of course worked on the most important deals and was the most sought after deal maker, and so you know, to work for him was considered to be very prestigious at the firm and outside the firm and looked great on your resume and made you valuable in the marketplace. And then, of course, he eventually would sour on you and move on to somebody else, and so many people who had had that experience felt like it was a death sentence.
But you know, ironically, the guy, Ken Jacobs, who's been the CEO of the firm for now 10 years, 11 years, he worked for Felix, although he worked for Felix on deals sort of on the latter sort of 20% of Felix's career. He was slowing down a little bit, and Felix then left to become Ambassador to France. He wanted to be treasury secretary, he wanted to be vice chairman of the Fed. Neither of those things happened, and Ken Jacobs was, I guess, the exception that proves the rule. He was the one who was able – I mean, he's a corporate zealot. He was able to absolutely convert his relationship with Felix into power and prestige at the firm and has been at the helm of it for 11 years, you know, after Bruce Wasserstein took it over and then died. So you know, Lazard has been very, very good to Ken Jacobs, and he's one of the only ones who sort of fell into Felix's orbit and then managed to benefit from it.
Dan Ferris: Interesting. I mean, of course, it's not unusual for people to say, well, you know, I worked for this great guy or whoever that everybody knows, you know, somebody even like Steve Jobs or whatever. It's not unusual to say, like, this guy was insanely difficult to work for, but it just struck me as a little odd that it would be, you know, all these folks in the book, at least, that you describe. Just said it was, you know, a dead end, or even bad for their career. It just – the firm just seems like a – it's like a stable of racehorses or something, and the fastest horse got all the attention and the rest of it was just chaos. It had to be impossibly difficult for most folks to get along in an environment like that. I mean, did they chew up associates and spit them out? I mean, was it high turnover?
William Cohan: Of course, yes, which is probably how I got there in the first place. You know, partners wouldn't leave for the longest time because, you know, they'd struggled to become a partner, then once they were a partner, they had all the leverage over the non-partners and could order people around and they were getting paid so well that, of course, they didn't want to leave. And that became a problem for the rest of us because the people at the top wouldn't leave, and so we couldn't get our shot. I mean, at least at Goldman you know you're a partner for six or eight years and then they shove you out the door so that you can be Treasury Secretary or something. But at Lazard, they didn't do that then and, you know, people stuck around and it was sort of very frustrating. But it was – I mean, that's why I wanted to write this book to show people, to share with people what it was like to work at this firm, you know, which had this, like, literally soaring reputation and was filled with, as you pointed out correctly, at the start Great Men, but it was utterly dysfunctional, utterly chaotic. It was really quite Darwinian in many ways. And don't forget, this is an era, you know, before it went public, before HR departments, before the #MeToo movement. I mean, this was, you know – you know, in some ways, it brought out the best in these people, mostly men, but also brought out a lot of bad qualities too.
Dan Ferris: I'll say. You have a whole chapter about – you mentioned the #MeToo movement. You have a whole chapter about how poorly women were treated, which brutal, absolutely brutal, literally in at least one case.
William Cohan: You know, the funny thing is that – so that book came out in 2007, and that chapter has been there for 13 years now, and the #MeToo movement, nobody picked up on it, it had no impact, none of those people have been held to account, none of those people have still been held to account. And sort of either before the #MeToo movement or after, just nobody cared. It wasn't in the New Yorker, it wasn't in the New York Times, no reviewers mentioned it. So I don't know. Lazard got a big pass on that.
Dan Ferris: So by the way, I said I've read a chunk of this. I can't wait to finish it, and I think it's – you know, I've read tons and tons of financial books, but – and I admit to not having read a word of yours before. Like, I heard your name, but I have to tell you this is, like, one of the very best few financial books I have ever read. And I've got Money and Power is another one of yours on my desk, and I'm just about to order Four Friends, which I'd like you to talk about a little bit because this book really hits close to home for you, doesn't it?
William Cohan: Well, I mean, first of all, thank you for those kind words. You know, I think that each of my books, in its way, is about topics that I'm familiar with. I mean, I worked at Lazard, I competed against Bear Stearns and Goldman, I went to Duke and then this last book is about four friends of mine from Andover, where I went, and what happened to them in their lives. And of course, unfortunately, they all died young and tragically. And so, you know, this was my way of trying to both remember them, pay homage to them in some way, but also try to figure out what happened to them in their lives. It was a mystery to me. You know, after we went our separate ways in high school, you know, this is a time before you could keep in touch with people by cellphone or, you know, heaven forbid, social media or Facebook or any of those things. And so, you know, when you went your separate ways, that was kind of it.
Then I'd, you know, maybe run into them occasionally or see them at a reunion or something, but basically we went our separate ways, and the next thing you know, I'd heard that they had died, you know, tragically. And so I sort of collected their stories in my mind and decided that I wanted to, you know, commemorate their lives by writing this book. And it was both an homage to them, but also a serious investigative reporting challenge because obviously they weren't here to interview, and so I had to triangulate around their lives, what had happened to them, who their friends were, what they did after Andover, you know, their loved ones, their wives, their girlfriends, their friends. So – and then of course had to confront the tragedy of the end of their lives and what actually happened on that day. And so, yeah, it was very personal but also a serious journalistic enterprise and just like my other books. So you know, it was a nice way to continue to be challenged journalistically but also, you know, not have to write about, you know, a Wall Street firm or some big scandal like occurred with the Duke lacrosse case. So it was sort of a different path for me to go down while also feeling sort of intellectually fulfilled.
Dan Ferris: Right. And one of these folks is JFK, John F. Kennedy. You went to Andover with John F. Kennedy.
William Cohan: Junior. John F. Kennedy Jr.
Dan Ferris: Oh, JFK Jr. Yes. Sure. What was that like?
William Cohan: Yeah, so it was obviously well-known and much written about, and so my challenge there was, of course, writing about him in a way that had never been written about before, which was from the perspective of his variety of friends who knew him best as he was growing up and as he lived his life.
Dan Ferris: Do you have any memories that you would like to share about any – there are four subjects in the book, like you said. Are there any memories of any of the four of them that you would like to share with us? I'm sensing a little hesitation to talk about JFK Jr.
William Cohan: I mean, obviously I wrote about these four guys in this book, so I don't have any hesitancy. I mean, I didn't really hold anything back that's not in there. Obviously there were things that were edited out just for length and space reasons, which you never quite understand, but you know, the publishing industry has this view about how long books should be if you want people to read them, which I guess there must be some merit in that. I always feel like if you got your hands on a great yarn well told, that you know, you just kind of want it to go on, not interminably, but go on as long as it needs to go on. But no, I don't think there's anything that I felt was, you know, cut out that I, you know, feel needs to be shared. I mean, there was a lot that I'd written about sort of my own schooling and upbringing and experience at Andover that was more or less cut out, but you know, I will say that one of my favorite stories which I do tell in the book with John is how we were in the same dorm and I was his senior advisor, one of his senior advisors, and we were friendly, obviously.
And his mother, Jackie, who of course my mother revered because we grew up in Massachusetts and revered the Kennedys. And she wrote – she used to write letters to John, you know, in her handwriting on, like, regular small, ridiculously lined paper. Nothing fancy at all – in fact, the opposite of fancy. And he would get these letters and toss them in the wastebasket. And I don't know, I happened to be in his room one day when he was tossing away some of these letters, and I thought to myself this can't be. These can't be tossed away. So basically I reached in and grabbed a couple of them, which I still have, and preserved them. And so now I sort of have these handwritten letters from Jackie to John, neither of whom are around anymore, that you know, are very sort of precious to me, even though they don't really say much or anything. They're just like a letter from a mother to a high school son. But you know, that's the kind of thing, you know.
And in many ways, I think John was – his plumage, you know, if you've ever watched The Shawshank Redemption, you know, talk about the plumage being too bright, and I think that John's plumage was too bright for this world. He kind of attracted just too much attention and warped space and time and warped people's behavior. People wanted to get close to him. The star power was just magnetic, and I think that it was almost too much for people – too much for people to handle. And you know, I'm not saying that it was – obviously not saying that it was a good thing that he died, but it was – you know, he probably – you know, it's not inconceivable to me that we would be talking about him as president now, instead of Donald Trump. So he had so much wattage and star power and such a spellbinding effect on people like I've never seen anybody before. And I've met Donald Trump and I've met Barack Obama, and I mean, they just don't compare to the star power and wattage that this guy had.
Dan Ferris: Interesting. Very interesting. I would not have expected that. So we're actually coming to the end of our time, which seems to have passed in a minute, but what I'd like to do, Bill, my next book after I finish The Last Tycoons, I think is probably going to be your other book, Money and Power because I love Last Tycoons so much and I want to learn about Goldman Sachs, which is what Money and Power is about. So I'd like to read that and get you back here at some point to talk about that.
William Cohan: Sure, I'd be happy to do that. That'll probably be several months. That's another long book, but yes, I'd be happy to do that.
Dan Ferris: Yeah, it'll take me a little while. I mean, I've got to finish, you know, Last Tycoons first. They're both, like, 600 pages, just so everybody understands what we're talking about here. But I wonder, you know, with your career and your experience and all these wonderful books you've written, I ask all my guests this one last final question. If you could leave our listeners with a single thought about anything – life, finance, money, love, whatever it is – if you could leave our listeners with a single thought, I wonder what it might be.
William Cohan: Well, you know, interesting question. I'm writing my new book about GE. Remember I told you I had my first job at GE financing leveraged buyouts, and you know, and I told you also that I tend to write about things that I know, so I spent two years at GE, and I'm not saying I know it really well, but I'm writing my book about sort of the rise and fall. And in the writing of that – and I'm still writing it. It's a long process, but in the writing of that, I came across a quotation from Ida Tarbell, who was the great investigative journalist of her day, and she wrote this in 1932, and I think it's a beautiful thought, and so why don't I just read to you this short quote that she writes that I have at the beginning of this new book. And I think that it sort of epitomizes what my life has become all about, and I think, you know, sort of you could put it on my grave and I'd be happy. So here's what she wrote in 1932. "I've never been one who felt that the praise of him you believe to be a good man is a shame to a writer any more than I felt that the condemnation of a man you believe evil is a particular virtue in a writer. A biographer's business is to set down faithfully as he can what he finds." That's what I try to do.
Dan Ferris: Well said. Yeah. Well, you know, you did it like crazy in The Last Tycoons, but you know, I'll get back to you on the other ones as soon as I can.
William Cohan: Well, you can imagine not everybody is happy with what I write, but that's the way it goes.
Dan Ferris: Oh yeah, I'm sure. I'm sure you have a few folks who'd rather you didn't write these books, but you know, we're not among them.
William Cohan: Well, thank you.
Dan Ferris: Thanks a lot for being here, and like I said, I hope we'll talk to you again pretty soon.
William Cohan: My pleasure. Thank you. Thanks for having me.
Dan Ferris: Okay, Bill. Thanks a lot. Bye-bye for now.
Well, I'll tell you, I feel like we really should have talked for, like, three hours instead of 30 minutes or whatever it was because just the content of these books that this guy has written, that Bill Cohan has written, is very, very deep. And it's – there's so much there and it's so rich. The Last Tycoons, the one that I'm part of the way through, it's like an opera. It's intense, and it's intense for 600 pages. It's amazing. Like, each chapter is like its own little book about that topic. And normally a long book will intimidate me. This book is not intimidating. You just dive right in and it's just rich from page 1. So obviously you can hear in my voice I feel like I've discovered, you know, a cache of gold treasure or something with Bill Cohan's books, and I'm just really excited to tell you about it and I'm excited that we got to talk to him, and I'm pretty sure we're going to talk to him again, so I hope you enjoyed it. But let's look at the mailbag now.
When my friend and colleague, Steve Sjuggerud, talks, I listen. Steve predicted the rise of gold in 2003, the top of the dot-com bubble in 2000, and he even called the bottom of the Great Recession in 2009. Steve is once again pounding the table in a new prediction. He believes that a mania will hit the U.S. stock market and take most investors by surprise. He said that thousands, if not millions of dollars will change hands as a result of the anomalies he found in the market. If you want to find out how you can profit from Steve's prediction, he has laid everything out in a video that just went viral. Go to www.investorhourtruewealth.com to watch the video and find out how you can profit in this roller coaster of a market. I watched it, and what Steve found is astonishing. Again, that's www.investorhourtruewealth.com.
In the mailbag every week, you and I get to have an honest conversation about investing or whatever is on your mind. Just send your questions, comments and politely worded criticisms to [email protected]. I read every word of every e-mail you send me. I did so again this week, and I respond to as many as possible. Now, there weren't very many e-mails this week, and I only saw two of them that I thought really would make a good discussion. So the first one is from John R, and I can't read the whole thing, John, but I will read where your question begins here. The question is, "I would like to get your opinion on the following. If inflation does occur and investors demand higher interest rates to compensate for inflation as well as the increased credit risk that could exist in the markets due to the economic impact of COVID-19, couldn't we see an inflationary period where real estate gets absolutely destroyed because real estate prices have actually been the result of the current low rate environment? As I look to the future, I see the possibility of an anomaly where inflation rates are increasing but the value of real estate is rapidly decreasing due to a high rate environment, the demographics of boomers no longer need homes, and the possibility of higher taxes due to weak municipalities. I would love to hear that I am wrong, but if you think I am correct, what is your opinion on the best way to prepare a profit? Thanks, John R."
Okay, John. I'm not a predictor. What you say – there's a wide range of outcomes out there that nobody's considering, and you're considering one that most people don't, and that's a good thought exercise. What tends to happen with rates, you know, just historically, right? I don't know the future, but what tends to happen with rates, rates are the symptom. Think of them more as a symptom than a cause, right? People buy bonds and rates go down way low and they're afraid of what? Of asset values falling on other things, right? And then rates go higher when asset values are increasing and there is a demand for money, right? Higher interest rate means there's a demand for money and people are competing for money. So what really tends to happen in these things is, you know, people don't mind paying the higher interest rate because they think they see asset prices inflating and rising. And I think, you know, if we see a classic kind of a setup, that's what you get. But you point out the demographics of boomers, baby boomers, basically all the folks who were born in the post-World War II baby boom, they're aging and no longer need – you said they no longer need homes. I get what you're saying. Maybe they're downsizing to smaller places or moving into an apartment or something like that, but they're not putting a bid under houses the way they used to.
The millennials are a larger population cohort now than the boomers, so they're young, they want to have families. They might have different values. Maybe they don't want to own a 4,000-square-foot monstrosity or something, but they will want some kind of a home that somebody's going to build and some bank is going to lend them money to buy it. So you know, I tend to think that maybe this is an unlikely scenario that you're spelling out here where we're seeing asset prices inflating and yet real estate is rapidly decreasing because you're saying it was caused by a low rate environment. I tend to think of the low rates more as a symptom than a cause that way, although I know, you know, they are a cause in a big way. But it's a good question. That's all I got for you, John. I hope it helps.
The only other question here I got is from Michael O. Let's see. Let's just get down to his question. It says, "You've had a few guests on recently, most recently Cullen Roach, who proposed the idea that the actions of the Fed are not inflationary since they are just swaps of one type of asset for another. To me, it seems that this idea of an asset swap misses the main point that one of those assets has been newly created from nothing. If the Fed swapped existing dollars on its books for bonds, then leaving aside the money multiplier effect on fractional reserve banking, it would be a straight asset swap. But when the Fed is adding new money to its balance sheet and then swapping it for bonds, it is not a neutral asset swap. Roach saying that it is the Treasury's actions that are inflationary also seems like sleight of hand. The Treasury issues debt. If citizens were to buy that debt with their existing money, that would be an asset swap and not inflationary. It is the fact that the Fed buys that debt with new money that is inflationary. Maybe there is something I'm missing in his argument. As I said, I want to understand the opposing view, but him saying it is very complicated doesn't cover it. I'm a professor of economics, so I'm confident I could probably grasp it. Really enjoy the show. Keep the faith, Michael O."
Yeah, this is all good stuff. If I could point out one thing in all of this, Michael, not all new money creation is inflationary, right? You did mention the multiplier effect with fractional reserve banking, but historically, increasing reserves, playing with reserves, I would say, that has been one of the longest practiced tools in the Fed's arsenal from the very beginning. From the beginning of the creation of the Fed, November 1914, that's when they actually opened for business. You know, the act was passed in 1913, but since the very beginning, interest rates and the suite of tools was really – the big tools were really reserves and interest rates, and now they do some other things. But the idea, though, you know, if you create more reserves, maybe banks make more loans, and that multiplier effect kicks in, right? And stimulates things. But what really tends to happen is that, you know, rates are low because people are scared of deflation. And when the Fed is swapping, you know, they go into the market and they buy these income-producing securities and basically, you know, they create cash and buy the income-producing security like Cullen was describing. They're taking income out of the system. That's deflationary. And then they're creating this reserve that uh, wa, nn, wa, it just doesn't get used. There's no multiplying. You know, the multiplying happens when there's a big demand for money and people are making lots of loans and asset prices are going up and people want to buy those assets. You see, not all money creation is inflationary, I think is – that's the real crux of it here.
I'm not answering for Cullen, by the way. He might say something different than me, and he's a lot more knowledgeable about macro than me, but I'm confident in what I'm saying. Not all money creation is inflationary. I mean if that were true, things would be a lot different over in Japan, right? And would have been for the past couple decades. And then you have this other portion, you said, "Roach saying that it's the Treasury's actions that are inflationary also seems like sleight of hand. The Treasury issues debt. If people buy debt with existing money, noninflationary, if the Fed buys debt with new money, that is inflationary, not necessarily, Michael. I don't think that's necessarily true, right? Remember, they are removing income from the system. They're not going to take their income and go out and buy – they're not going to Walmart, you know. They're not buying a house.
So then we get this new reserve created which doesn't get multiplied because people are scared as hell and they're not buying stuff. So that is my understanding of the answer to your – you know, that is my answer to your question. I do not speak for Cullen Roach. The man can speak for himself and knows a lot more about it than I do, but that's what I would say. I hope that helps you and, you know, if it doesn’t write in again. We'll talk some more.
Okay, that's another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as I did. Do me a favor. Subscribe to the show on iTunes, Google Play, or wherever you listen to podcasts. And while you're there, help us grow with a rate and a review. You can also follow us on Facebook and Instagram. Our handle is @investorhour. You can follow us on Twitter. Our handle there is @investor_hour. Have a guest you want me to interview? Drop us a note at [email protected]. Till next week, I'm Dan Ferris Thanks for listening.
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