Businessweek Extra - Michael Ainslie

at moments in our history. Well, we talked so much about being in the room where it happens, of course, but so many rooms and some amazing places that he's been. He's got a new book out, it's called A Nose for Trouble, and we're so delighted he's here with us in New York City. First of all, Michael, congrats on the book. Welcome back to Bloomberg. Thank you. It's nice to be here. So why do it? You know? Two reasons.

I have a lot of young people that I care about, five kids, eight grandkids, scores of posse scholars that I've mentored over the years. I want them to know that life is not easy. There are a lot of bad things happened to all of us, and the question is how do you deal with it, how do you learn from it? Where do you go next? So my nose for trouble got me into some difficulty every decade of my life, and I think I've made some pretty good

choices afterwards. Second reason, there's a whole story about Lehman that's never been told. We were muzzled as directors for five six years by the lawyers saying we couldn't talk, and I have views on that. The rest of that story, Well, Jason, I would go through the galleys, and I think both of us were like, all right, where's the Lehman party? Because I do think you were in the room where it happened. When it came to the vote on whether or not Lehman should file for bankruptcy. Take us there.

It was incredibly scary. Uh. It happened so fast. We thought the Fed would continue to lend to us, We thought there might be a merger, and yet that weekend it became clear the government was backing out. They were not going to do their job as a lender of two financial institutions, and the biggest bankruptcy in world history was facing us. We considered not doing it. We said, let's see if they'll really flinch. Will they lend tomorrow

morning if we don't declare? But what a terrible game of chicken to be playing it was if if if we had said no and they had said no, we'd probably all not be here right now. It would have been awful. And so as you've had time to both think about it yourself, obviously you put a lot of it down in the book, as you've had a chance to talk to to other people, what were those sort of catalytic moments, both in your board room and in Washington that ultimately led to the fate of Lehman. Well,

Hank Paulson, Well, not like my book. Yeah, but he's got a tough skin. Uh. First of all, it was Bernankee's decision. The Federal Reserve is supposed to lend to financial institutions. They abdicated and turned it over to Paulson. Paulson made a political decision. It was not an economic decision. He was not based on Lehman's collateral. There was plenty of collateral there. I want to promote not only my book, but this book. This is by Lawrence Ball, the dean

of economics at Johns Hopkins. This is the ultimate book about the Lehman bankruptcy. It's two hundred pages of data and very very thoughtful prose about what went on. And I really recommended anyone that's serious about financial history take a look at Larry Ball's book. He's a very very good scholar. In any event, um, we were we were

left with no alternative. Uh did you realize that in the last week of Lehman existence, our clearing bank JP Morgan Chase demanded and got eight point six billion of our cash collateral to shore themselves up against Lehman possible losses. Well, they had the right to do that. Apparently the fine print of their loan agreement let them do that, because we lost that lawsuit four years later. However, it drained the liquidity out of Lehman. We were solvent until literally

three or four days before the bankruptcy. So why why did it happen to Lehman? Why was why was Lehman the one firm that was allowed to fall? Here's my explanation. We all know that A I G was much bigger than Lehman. If they had gone under, the world would have changed. A I G oed Goldman sacks billions and billions of dollars for various commitments. In my belief, Paulson said,

I can't get both done. I can't save Lehman and save I G. And if I can only save one, I'll save a G. And I think we were collateral damage. We had done nothing wrong. That's why nobody went to jail. The examiner's suit. The bankruptcy examiners said, there's no colorable crime here and no colorable violation. Value their management for the board. But when the FED closes its window, you

can't function. Michael, one of the things you talk about in your book, both explicitly and implicitly, is that ultimately, these are people making these decisions. These are people with relationships, longstanding relationships, some good, some bad, and at the very least complicated. What do you make of the role that some of those relationships played in the ultimate demise of Lehman. I think they were important. I think Paulson liked and was close to his successor at Goldman. He didn't like

Dick Fold. They had had very contentious relations over the years. Lehman had stolen some of Goldman's best people. John Walker had just come over to run asset management for Lehman. Uh Fold had turned down a request to put a lot of money into long term capital management back in the late nineties. We were asked to put into fifty million. Dick finally, very late in the game, put in a

hundred million for for Lehman. Paulson was furious. Paulson felt Fold wasn't trying hard enough to find a takeover partner or a merger partner, so there were a lot of frictions there. Michael, was there any point in the stage leading up to September when Lehman filed for bankruptcy? I know that date, It's my anniversary, so it's kind of

in my brain forever and ever. But I do wonder do you recall in those days leading up where there was the possibility that they could have been bought at, that there could have been a partnership or a combination that would have really changed the future of Lehman, That Lehman would still be around today, maybe in some form, maybe not in name, but in some form. Well, I mean it is still kind of around if you think about the assets and how they were distributed, but in

a different way. The closest we came to a merger was with Berkeley's and that should have happened. Uh. The Chancellor of the Exchequer in in London said we won't give you a waiver of a shareholder vote. That killed the deal. But he could have done that, we believe, and uh, that should have happened and Berkeley's would be you know, some form of combination of Barkley's and Lehman

would still exist. What were the American officials helping you was in terms of that process as as much as they could have, because because at that point everybody had to come together because it was a global crisis. I think they were. I think Paulson really did want to

see that happen. The sad thing is that Alistair Darling, the Chancellor of the Exchequer, said we don't want to import your cancer, not knowing that as soon as the bankruptcy occurred, London's Leahman operation, which was huge, would be bankrupt also. So they did get the cancer. And you write about this in the book, Michael, sort of the aftermath, and obviously you've had some years to reflect on it. As as we've talked about so as a businessman is

a very successful businessman. As a human being, what do you take away from what do you internalize that either changes your worldview, changes your view of the financial system, changes your view of maybe the next crisis um less leverage all the banks, we were right there with them, we were too leveraged, more equity UM. So that's been a good thing coming out of the financial I think,

and we should not be rolling back those regulations. However, the Fed's ability to act has been severely restricted by Dodd Frank for example, and I only recently learned this. Any refinancing that the FED approves now has to be approved by the Secretary of the Treasury, which makes it back to political politics. I don't think that's a good rule. The FED should focus on the banking system, not on the politics at the moment. What about is a human being?

What what do you take away from it? Because that is a harrowing experience, as harrowing probably as anything from a financial or a business perspective that anyone's gone through in in in our lifetime. You see those people carrying their boxes out like it's it's hard not to have an impact, right, it's uh, you know you realize how you know how many people were affected. And I study economics. I love the field, and that's why I became a

real fan of Lawrence Ball. He has done a study of the post ten years after Lehman, of the twenty three countries of the O E c D, the growth rates in those countries are still dramatically suppressed because of the Lehman bankruptcy. It's still hurting our world. Why do you think the German bond ten year German bond is selling at minus point six or whatever it is negative yield. The world's economies have not recovered today, twelve years later

from the Lehman bankruptcy. That's why I think it was a huge policy mistake. I think Paulson should have fought to save, at least for the moment, wipe out all the equity holders, dilute, don't give the shareholders anything or next to nothing, but don't let this this company go into bankruptcy. All right, Well, we'd be remiss if we had you and didn't talk a little bit about soth Bees.

That was also an interesting chapter, to say the least, in your life, what's the most notable thing that that you remember, that that you take away from that experience? Because you write extensively about it in the book. UM. Sotheby's is a great, great institution. It's just been sold again recently to a Frenchman Pratt Patrick Rockey. Private, private, which it should be. It's not a business that should

be in the public markets. It's two seasonal and cyclical and uh subject of short sellers telling stories and so fixing. That's that's the story that is so painful. The auction business has two sides to its revenue. The buyer's pay part called the buyer's premium. After the recession in the early nineties, I changed the buyer's premium to a sliding

scale and that has really really sustained the business. After I left, my successor looked at the other side of the commission structure, what's called the selling commission, seller's commission illegally with Christie's working for several years, she built up a file of five hundred pages of illegal documents. It's incredible to me that they did this and thought it could be gotten away with UM. In any event, that almost took Sethby's down and almost put the company out

of business. With the fines, the penalties, the client relationships that were lost in damage and you had no idea you were there to ninety four think for a decade, no idea, no idea. I stayed on the board for three more years, uh Taubman's request, and UH saw some of the changes happening, some of which I didn't like, but I was no longer CEO. But um it came out in two thousand and the way it came out as interesting. The Christie CEO Christopher Damage was fired by

UH French Saspino that the owner of Christie's. He gave a few pages of these documents, these illegal documents to Pino, and said, if you want more of these, you're going to have to pay me. And so Pino obviously weighed his options and chose to pay him ten million I

think it was ten million pounds. He got the five page package of illegal agreements, sent them to an American lawyer where they were known as the hot Potato, and that led the race to the Justice Department because the first one in gets immunity, and Christie's apparently beat Dede Brooks by a day or two and they got immunity. Although Anthony Tennant, their chairman, could never leave England because

he was implicated in any event. It was high drama and really a tragedy, and it just shows, you know, a moral compass is the most important thing in business in my view. I love that you say that. Jason and I have so many conversations, and we were talking about you say in your book how much you learned from your father in terms of how to treat people?

And we both said the same thing. You know that my dad didn't matter whether you were the head of a company or you know, somebody at a grocery store. And I feel like we've gotten away from that in terms of treatment of people, and also the moral compass, whether you're a politician, whether you're a business person. What's happened? You know from the varsity blues like what has happened? Am I just being an older person looking back to the sweeter days? What has happened? I wish I had

a good answer. I wish I knew, and I wish I could help go back to the way we we did things. And I think most people still do. I think too much. This is a money yes, yes, And I say that in my book. After I left Sotherby's, I looked at where I wanted to put my energy. I was in my fifties, I still had a lot of energy left and the money that was chasing art. It was really not about buying art. It was about the buyer of the art getting a high profile, wanting

to be visible, wanting to be known. Overnight. You could become a world celebrity by paying a hundred million dollars for a Picasso. You still can, and they do. Um. So I put my efforts into into my Posse Foundation. I'd love to tell you about possee tell us about it. It was a really online about it. When you're helping other kids right get opportunities education. Thirty years ago, I'm still at Southern Bey's. I met a woman named Debbie Beale.

Debbie was a twenty four year old young, idealistic great UH community leader and she was interviewing a bunch of kids who had dropped out of college but had the ability to do the work. And one of them spoke up and he said, I would never have dropped out if I'd had my POSSE with She said, Posse, it's at me. What's that? He said? My guys, my gals that backed me up, my buddies. She Debbie is an amazing woman. She's now one of the MacArthur Genius Awards.

She's still CEO and president of POSSE. She called up a friend at Vanderbilt, where I was an alumnus and a board member, and asked him, would you take a big gamble on a bunch of New York kids that can't measure up on your s A T s because they can't afford SA T prep courses and they don't go to the great schools. But they are leaders. They will be leaders and they will change your culture on

your campus. Fortunately, this professor went to the Dean of of of Education at Vanderbilt, to Peabody School of Education, and they said, let's do it. We need some more kids from New York. Suddenly six kids. The first POSSE was six kids arrives in Nashville, and they were a Dominican and African American and you know whatever, and they hit the campus by storm. The star of that little

group was a woman named Shirley Collado. Shirley I almost get terry when I started talking about it as Shirley Dominican cab driver's daughter, mother worked in a factory or a pharmacist. Actually, um, they did not want her to go to Nashville to Vanderbilt. She went on to be a star at Vanderbille, get her PhD at Duke in clinical psychology. When into academ was the dean of the college at Middlebury. She's now the president of Ithaca College,

and she's on the board of Vanderbilt University. And she was just on the search committee to pick the new chancellor Vanderbille. Now that's what changing someone's life will do and and change our institutions. We need more kids and people of diverse backgrounds, all kinds of backgrounds on boards making decisions in the room. As you said, then the destations are better. It's all about access. And we've seen the research about the importance of diversity. We've got to

leave it there. There's so much more we want to talk to you about. So come back enjoining you and everybody should check out the book because it really is inspiring and trouble. Thank you, Michael Ansley. Thank you, And you've been listening to Bloomberg Business Week Extra, be sort of tune into Bloomberg Business Week Radio Live Monday through Friday at two pm Wall Street Time. I'm Bloomberg Radio. I'm Carol Masser, and I'm Jason Kelly. This is Bloomberg