<iframe width=”560″ height=”315″ src=”https://www.youtube.com/embed/ZyH2wXC6DkY” frameborder=”0″ allow=”accelerometer; autoplay; encrypted-media; gyroscope; picture-in-picture” allowfullscreen></iframe>Nov.14 — Blackstone Group Inc. Chairman and Chief Executive Officer Stephen Schwarzman talks about starting the firm, surviving the real estate crash of 2007, and being rejected from Harvard. Schwarzman appears on “The David Rubenstein Show: Peer-to-Peer Conversations.” The show was recorded on Sept. 4 in New York.18:15it worked out and alchemy you did the18:18IPO and Chinese invested and then after18:21you did the IPO let me mention two deals18:24that you did one was the biggest real18:26estate deal in history GOP real estate18:29company built by Sam Zell and you did a18:3240 billion dollar buyout in effect is18:34that right yeah it’s 39 actually okay18:36all right thirty nine billion dollars it18:39was a bidding war you won the bidding18:41war but the real estate market crumbled18:43right after the deal was done so how did18:44you survive with that deal well we18:47worried18:47because the same reason we were going18:49public I sense we were a market top forreal estate so so just buying 39 billiondollars of real estate III thought wasdangerous because you had to pay apretty good price to get it because itwas competitive so as as soon as wedecided we were going to actually raiseour price enough to be the winner therewere two or three of us sitting aroundsaying this deal is potentiallydangerous we’ve got to reduce theleverage and we’ve got to take advantageof the crazy pricesthat people are paying so we’ve decidedto sell half of what we bought the sameday we bought it so when I told peoplethat they just sort of looked at me andand said the same day I said I don’twant to take any risk that the world’sgonna change and we’re gonna be stuckwith all of this so we basically hadevery conference room at the firm activeone buying but then we broke it up intoall these pieces but if you hadn’t doneyou would have lost all your money Ithink that’s probably a market crateredvirtually the next day right becausemost of the people who bought from usbasically got into enormous financialtrouble or went insolvent and and soafter we did that and closed everybodywent homethey’d been sleepless three days laterthey came back and we said let’s sellhalf of what we got left now and be evenmore conservative so everybody went backto workand we ended up with one quarter of whatwe bought very conservatively priced sowe could survive any kind of nuclearwinter we ended up making three timesour money buying right this this giantthing at the top and andthere’s never been more than ten billiondollars bought or sold by a group we did70 billion so you wants to blot anothercompany before the recession really hitthat was caught Hilton and that was aleveraged buyout and some people might21:17say at the top of the market and that21:19deal went down in terms of the debt and21:22maybe the equity but then you openly did21:24things that made it the most profitable21:26buyout in the history of buyouts what21:28did what did you do well that was pretty21:29easy actually looked hard but you know21:34Hilton had not been integrated they were21:36running for different headquarters and21:38there was a huge modernization and and21:42and and cost takeout Oklahoma you sold21:45it up about a fourteen billion dollar21:47profit yes well if we had held it it21:49would have been held it longer it would21:51have been over 20 so so it was a good21:54day21:54cuz nice forty nine billion in recent21:57years you’ve become one of the nation’s21:58biggest philanthropists you gave three22:00hundred and fifty million dollars to MIT22:03for a computing Center and related to22:05artificial intelligence you never went22:07to MIT you had no connection there how22:08did that come about well that was that22:10was really fascinating i I’m not a22:12technologist I had met the president of22:16MIT Rafael Reif and we started talking22:19and you know I we were concerned that22:23the u.s. was just not investing enough22:25in these technologies and I said do you22:28have any interesting ideas so he came22:33back with a let’s double the computer22:36science faculty let’s take our it’s22:39established a new department in effect a22:42new school called it a college which is22:46now gonna be the MIT schwartzman College22:48of Computing and let’s connect AI to all22:52the other departments at MIT so MIT will22:57become the first AI enabled university23:00in the world and I said now that’s a23:03vision I could buy in on final question23:06I’d like to ask you it just deals with23:08this if somebody is watching or reading23:10your book23:11and they want to be a leader a leader in23:13business or philanthropy or or in23:16government what do you think is the key23:17quality to be a leader and what have you23:19seen as their key quality enable you to23:21be a leader I I think to be a leader you23:23have to be a really good listener you23:27have to understand what’s going on23:29around you you you have to be measured23:33and and you have to realize that23:36everything you do is amplified in the23:41minds of the people who are listening to23:42you so so care nuance kindness but23:49defining a culture it’s what a leader23:53does Steve thanks very much for this23:56time I appreciate it thanks David
For 40 years, elites in rich and poor countries alike promised that neoliberal policies would lead to faster economic growth, and that the benefits would trickle down so that everyone, including the poorest, would be better off. Now that the evidence is in, is it any wonder that trust in elites and confidence in democracy have plummeted?
NEW YORK – At the end of the Cold War, political scientist Francis Fukuyama wrote a celebrated essay called “The End of History?” Communism’s collapse, he argued, would clear the last obstacle separating the entire world from its destiny of liberal democracy and market economies. Many people agreed.
Today, as we face a retreat from the rules-based, liberal global order, with autocratic rulers and demagogues leading countries that contain well over half the world’s population, Fukuyama’s idea seems quaint and naive. But it reinforced the neoliberal economic doctrine that has prevailed for the last 40 years.
The credibility of neoliberalism’s faith in unfettered markets as the surest road to shared prosperity is on life-support these days. And well it should be. The simultaneous waning of confidence in neoliberalism and in democracy is no coincidence or mere correlation. Neoliberalism has undermined democracy for 40 years.
The form of globalization prescribed by neoliberalism left individuals and entire societies unable to control an important part of their own destiny, as Dani Rodrik of Harvard University has explained so clearly, and as I argue in my recent books Globalization and Its Discontents Revisited and People, Power, and Profits. The effects of capital-market liberalization were particularly odious: If a leading presidential candidate in an emerging market lost favor with Wall Street, the banks would pull their money out of the country. Voters then faced a stark choice: Give in to Wall Street or face a severe financial crisis. It was as if Wall Street had more political power than the country’s citizens.
Even in rich countries, ordinary citizens were told, “You can’t pursue the policies you want” – whether adequate social protection, decent wages, progressive taxation, or a well-regulated financial system – “because the country will lose competitiveness, jobs will disappear, and you will suffer.”
In rich and poor countries alike, elites promised that neoliberal policies would lead to faster economic growth, and that the benefits would trickle down so that everyone, including the poorest, would be better off. To get there, though, workers would have to accept lower wages, and all citizens would have to accept cutbacks in important government programs.
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The elites claimed that their promises were based on scientific economic models and “evidence-based research.” Well, after 40 years, the numbers are in: growth has slowed, and the fruits of that growth went overwhelmingly to a very few at the top. As wages stagnated and the stock market soared, income and wealth flowed up, rather than trickling down.
How can wage restraint – to attain or maintain competitiveness – and reduced government programs possibly add up to higher standards of living? Ordinary citizens felt like they had been sold a bill of goods. They were right to feel conned.
We are now experiencing the political consequences of this grand deception: distrust of the elites, of the economic “science” on which neoliberalism was based, and of the money-corrupted political system that made it all possible.
The reality is that, despite its name, the era of neoliberalism was far from liberal. It imposed an intellectual orthodoxy whose guardians were utterly intolerant of dissent. Economists with heterodox views were treated as heretics to be shunned, or at best shunted off to a few isolated institutions. Neoliberalism bore little resemblance to the “open society” that Karl Popper had advocated. As George Soros has emphasized, Popper recognized that our society is a complex, ever-evolving system in which the more we learn, the more our knowledge changes the behavior of the system.
Nowhere was this intolerance greater than in macroeconomics, where the prevailing models ruled out the possibility of a crisis like the one we experienced in 2008. When the impossible happened, it was treated as if it were a 500-year flood – a freak occurrence that no model could have predicted. Even today, advocates of these theories refuse to accept that their belief in self-regulating markets and their dismissal of externalities as either nonexistent or unimportant led to the deregulation that was pivotal in fueling the crisis. The theory continues to survive, with Ptolemaic attempts to make it fit the facts, which attests to the reality that bad ideas, once established, often have a slow death.
If the 2008 financial crisis failed to make us realize that unfettered markets don’t work, the climate crisis certainly should: neoliberalism will literally bring an end to our civilization. But it is also clear that demagogues who would have us turn our back on science and tolerance will only make matters worse.
The only way forward, the only way to save our planet and our civilization, is a rebirth of history. We must revitalize the Enlightenment and recommit to honoring its values of freedom, respect for knowledge, and democracy.
Peter Schiff predicted a collapse of the U.S. financial system. The bust-up he didn’t foresee was the one that made mincemeat of investors who took his advice in 2008.
Mr. Schiff’s Darien, Conn., broker-dealer firm, Euro Pacific Capital Inc., advised its clients to bet that the dollar would weaken significantly and that foreign stocks would outpace their U.S. peers. Instead, the dollar advanced against most currencies, magnifying the losses from foreign stocks Mr. Schiff steered his investors into.
Investors open accounts at Euro Pacific to take advantage of Mr. Schiff’s investment advice, which generally involves shunning investments in dollars. Individual returns can vary. Some investors may like gold-mining stocks, while others prefer energy-focused stocks.
Most had one thing in common last year: heavy losses. A number of investors said their Euro Pacific portfolios lost 50% or more in 2008, worse than the 38% drop in the Standard & Poor’s 500-stock index last year. People familiar with the firm say that hardly any securities recommended by Euro Pacific brokers gained ground in 2008.
Such losses came as something of a surprise. Mr. Schiff’s prescient call for the collapse of the U.S. housing market and the weakening of the financial system helped him gain fame as an economic guru and savvy investor who promised shelter from the financial storm.
In his 2007 book, “Crash Proof: How to Profit from the Coming Economic Collapse,” he recommends that investors pile into gold, commodities and overseas stocks that spit out steady dividends.
When global markets were soaring, many Euro Pacific investors’ accounts experienced strong performance. For several years, investors saw returns in excess of 20% a year as foreign stocks and commodities surged, according to people familiar with the firm.
In 2008, investors nervous about the state of the U.S. economy who were impressed by Mr. Schiff’s track record poured money into Euro Pacific, nearly doubling the number of accounts to 16,000. But many did so at the worst time possible, much like investors who piled into Internet stocks as the dot-com bubble peaked.
Mr. Schiff, 45 years old, says the downturn in his strategy is a short-term setback. He argues that it is only a matter of time before the dollar collapses, pressured by massive government bailouts, triggering outsize returns for his investors.
“I think the dollar is going to get destroyed,” he says. Investors with the staying power to wait out what he sees as a temporary phase of irrational confidence in the dollar will reap huge rewards, he argues.
Mr. Schiff is still riding high on his housing-market call. This week, he spoke at a global competitiveness conference in Riyadh, Saudi Arabia, alongside former heads of state, prime ministers and American gold-medal swimmer Michael Phelps. He is the subject of more than 3,000 YouTube videos, including one called “Peter Schiff Was Right.”
His admirers even created Web sites supporting a possible run for the U.S. Senate in 2010. Mr. Schiff, who was economic adviser to Republican presidential candidate Ron Paul in 2008, says he has no plans to run for the Senate but “anything’s possible.”
Critics say Mr. Schiff’s strategy is much riskier and more aggressive than many investors realize. David Yeske, managing director of Yeske Buie, a Vienna, Va., money manager, says Mr. Schiff’s investment strategy was a focused bet on a single outcome, rather than risk management for investors looking to protect assets from an economic collapse. “He’s a speculator; he thinks he can see the future,” says Mr. Yeske, former chairman of the Financial Planning Association. “That’s not really risk control.”
One of Mr. Schiff’s biggest forecasts was that many overseas economies would “decouple” from the U.S., gaining strength even as the American economy struggled. Instead, overseas stock markets plunged as much or more than U.S. stocks in 2008 as the global economy skidded. Prices for commodities also tanked, torpedoing another favorite investment theme of Mr. Schiff’s. After last year’s losses, his firm has about $845 million in assets.
Early last year, Richard De Gennaro, a retired Harvard University librarian, put $100,000, about 15% of his assets, into a Euro Pacific account that included Canadian Oil Sands Trust, which focuses on crude-oil projects in Canada, and the India Capital Growth Fund, which holds investments in companies that do business in India.
Both investments took big hits in 2008, compounded by the fact that the Canadian dollar and the Indian rupee fell 18% and 19%, respectively, against the U.S. dollar. The 83-year-old retiree’s account is now worth about $37,000, a 63% plunge. Mr. Schiff “goes around saying that he was right,” says Mr. De Gennaro. “He was right about one thing and wrong about everything else.”
Among investors who turned to Mr. Schiff’s firm just as his strategy began to falter, Brian Kullberg, a design engineer in Portland, Ore., says he started to worry about the state of the U.S. economy in early 2008. He put $70,000 into a Euro Pacific account, hoping it would benefit as the U.S. economy and the dollar weakened. By late January 2009, his investment had shrunk to about $25,000.
“It’s curious,” says one longtime client of Mr. Schiff’s who works in finance. “His thesis of how things are going to collapse and crumble and fall apart isn’t effectively executed in [my] account.” The account, which is largely invested in gold, mining and infrastructure stocks from Canada to Australia, was down roughly 35% last year, the client estimates. The Australian dollar weakened 19% against the U.S. dollar in 2008.
Mr. Schiff says one year’s poor performance doesn’t prove he was wrong. He has admitted in notes to clients that his investment thesis hasn’t performed as expected, particularly with respect to the U.S. dollar. But he holds fast to his convictions and has been telling investors to scoop up a number of depressed stocks.
Some clients are inclined to agree. “The decoupling he talked about has not happened,” says Barbara Hearst, a clothing entrepreneur who splits her time between Charleston, S.C., and Bridgehampton, N.Y., and has invested with Mr. Schiff since 2000. But “longer term or medium term, I don’t discount what Peter says.”
Two high-ranking financial whistleblowers say they tried to warn their superiors about defective and even fraudulent mortgages. So why haven’t the companies or their executives been prosecuted? Steve Kroft reports.