Businessweek Extra - Michael Tennenbaum

and then moving to Puerto Rico. This is a guy who's definitely lived life and still doing so. Here's our conversation. Well, and this is a guy that I've actually known for a number of years. He also, i should say, big tennis fan, and he's joining us on the in the aftermath, I should say, of one of the most exciting US opens, but we're not going to talk about that a little bit. Michael Tannebaumb is here the new book Risk, Living on

the Edge. It's an unbelievable read, really captures the scope of what you've been doing, uh for a number of years now. Thank you so much for joining us in New York. It is a pleasure and an honor, particularly to hear that you've enjoyed my book makes me happy. We loved it. And I think in part because your story is really one of Wall Street over the last four decades in many ways, why did you decide to write it? Let's start there. Well, it was interesting. Actually

I was interviewed at Bloomberg. You've heard of them? And afterward, and this is not hint, uh the uh the journalist said, let's go across the street and have some drinks. And I said, you know a number of my more famous friends have written memoirs. And I was just wondering, I'm sure it was competitive, right, uh, if perhaps I should? And he said something so smart, He said, if you have a story to tell. And I said, you know, I'm not nearly as famous. He said, if you have

a story to tell. So, because I was an Army officer, I learned to keep records. You live by your file when you're a bureaucrat. And I had all these records, which I organized by topic and then in chronology, and I realized I did some pretty cool stuff. And and so I started writing, uh, my first effort, and I gave it to my son Andrew, who manages screenwriters, and he said, this is really interesting, this is good. Now get a writer. So I realized mostly I had written reports, right,

So I was very fortunate. We we met Donna Beach, who's a very wonderful uh ghostwriter, I guess and uh. And she made this book into something really interesting. You know, if I would mention someone's name, she would go do research and have have this color that she added. So it made me a much more aware reader of other

people's books. So that's how what happened. Well, we want to talk to you about your time on Wall Street, but I do want to just go into because the title of the book is risk, living on the edge, and that's a common threat. And you talk about risk, you know, by your grandmother, you talk about risk by your father, just in terms of coming to the United States and the risk that you've taken on throughout your life. Not everybody takes on risk. Well that's really the theme

of the book. Because the other thing I was advised to get a central idea. That's something you learned in English, right, I forgot it. So I began looking for a common thread, and I began talking to my super successful, more famous friends who keep working even though they're rich. And I said, you know, what is it? I mean, how have you manage your life when you came to choices? Which one

did you take? And they would ramble. And when I say, you see, each time you selected a difficult college, you selected difficult course, you selected difficult career, I said, do you understand that you have a propensity toward risk? And they thought about it and I said yeah. And then I said, and and by the way, it's because your way your brain is wired. You have a shortage maybe a serotonin, so you need more stimulus than other people. And and finally, why don't you quit? You got fame

in my bunny. And then they sort of, you know, pretend to be reflective and I say, well, I like it, or what else would I do? Or you know, I don't know, and I said, I'll tell you why you're addicted. And then they get very quiet, because that's that's a emotionally loaded. But it's true. Your brain wearing doesn't change and you keep going. And I became aware of that when I sort of retired to Puerto Rico four years ago.

I thought I would read and write and you know, hang at the beach, and I just I couldn't do it. I mean, and I didn't go buying bonds either. Well I did. I bought Puerto Rican bront So. But you see what I mean. But you see what I mean. You know, you got addicted to a certain way of

working and you get uncomfortable. I mean, you know, if I bought treasury bills, I would I'd be nervous that the inflation don't be back, which I think it is, by the way, But you talk about educated risk, right, risk with some skills, right, because there people take risk and they really, you know, run into trouble. But you talk about that in your book about having kind of a certain level of skills combined with risk creates incredible opportunities.

But that's ever so important. What you said, uh Ill, prepared risk taking is disastrous. I mean, you may get rich for a while, you're a child of your time, you know, and then boom, you give it back. So when you look at particularly those mountain climbers like in Free Solo, you know, the preparation is extraordinary. And you mentioned the tennis. Just imagine how hard those people work all year to be able to endure five hours of

asymmetric you know, torking of your frame. So preparation is vital and if you also have the risk appetite, the two usually leads to success, I believe. So speaking of risk, you were on Wall Street at a very well known house, bear Stearns, at a time when in some ways risk was really coming into vogue in a in a lot of ways. What did you experience what did you identify visa the risk when you were at bear Stearns. It

was interesting because as you say, Wall Street changed. Uh, it was year before pension plans, insurance companies could buy stocks. People traded in bonds. That's what they did when I went to Wall Street. Uh, beginning of nineteen sixty two. Uh, a couple of my classmates went to Morgan Stanley. They told me that their balance sheet, their net worth in was five million dollars. They didn't take risks, you know. They once they were in a good club. They went

there and they got business. So this changed over time as as the Commission structural eroaded and the fat income and profits of Wall Street was attacked, they had to take more and more risk, and that's how they survived and they put their money at risk in order to get transactions the block trades for example, and and risk then became I think almost a central idea of Wall Street and the universal banks. And when you don't do well, you see recently the earnings reports where trading profits were

down and now you have margins being squeezed. So you know that usually human behavior is pretty dorp right, So talk to us specifically about bear Stearns, because it really is one of the most storied houses doesn't exist anymore. We all know that all too well. You were onto your next adventure before that demise. But what was it specifically about that firm that that made it different because

you had a lot of very senior jobs there. Well, it was interesting when bear Stearns management top management changed, it was usually by what I call in the book brute force. Si Lewis made money trading bonds during the depression, and he pushed out the founders and and took control. And they were smart enough to see they didn't want to lose talent, so they let him do it and they stuck around. This was rather civilized way in Dorwinian

world to do things. Then Alan Greenberg, Jury Coolberg, John Rosenwald and sig Warsaker were the four most productive partners in the early sixties, and they went to the then senior partners like sy Lewis and said we're gonna leave if we don't take over, and once again brute force. The older partners were clever enough to realize they didn't

want to lose people like this. But the the change that broke that was when Jimmy Caine, through an extraordinary machiavellian UH campaign UH took control by first getting control over compensation, which is the key to Wall Street's heart and UH the eventually UH he had control. But he had not ever managed a large, successful department, so this

was different and with extraordinary risk taking. As I point out in the book, the change in composition of the balance sheet was amazing, and the fact that they chose to finance it with short term money which was very cheap, which boosted the return on equity which is how the bonus system worked. You know, it was an extraordinary risk ill liquid assets, overnight financing, bad combination right, which ultimately

led to their demise come the financial crisis. Well, as I say in the book, they had this huge portfolio of mortgage back bonds. And when the FED brokered the marriage between JP Morgan and bear Stearns, JP Morgan's board and their brilliant CEO, Jamie Diamond said We're just not going to take that degree of risk. So the FED had to retrade the deal on the Sunday where the FED made JP take of I think it was about

a billion and a quarter of the bottom risk. And then after that the FED stood behind this enormous portfolio. And then if you look at what happened to that portfolio over the next few years, it paid off in the had made billions. And so what I say in the books, bear Stearns, if they could have dealt with

their ill liquidity would have survived just smaller. So before any of that happened, you took what many would say is probably the biggest risk of your professional career, which is you're in California at the time to hang out a shingle, leave a very lucrative career at a big Wall Street firm, and start your own shop. You captured that moment, and it's a great moment between you and your wife where you're you know, you're looking out at

the at the water. If I remember correctly, and she essentially knows you well enough at that point to say, listen, you gotta do this. You're doing it. It's just a matter of how and when, What was inside you at that moment, what was in your head that convinced you this was the right move. As I told her, you know, when I was young, I used to like to swim. I was a lifeguard, and I dove off the low board a lot now. And then I went up to

the high board and dove off. And you walk out to the end, you look down and say, why am I doing this? You know this? Why you know you didn't want to climb back down the ladder. Sometimes you did, And I said it was like that, you know, I was so tempted to leave. I hated the climate at bear Stearns at the time and in the nineties, and and but every time I got out to the end of the board, I looked down, and then finally, yes, I said it was enough. And I think she was

afraid I'd retire and hang around the house. Gotta do something, you gotta do something, yeah, right. I took Fridays in the house, and so she would go to town on Friday, right, But what did you see that was the opportunity? Because you know you mentioned Jerry Coldberg. Jerry Coldberg sort of see something in nineteen seventy six with you know, two

young colleagues, Henry Kravits and George Roberts. You know, fast forward, you know, years later you saw something, an opportunity around distress and around a sort of new form of investing in many ways. What was it? You know a number of people have reviewed my book and said it has a lot of candor, you know, so I have to be candid. I didn't know what the hell I was doing, Okay, I just wanted to go prove I could do it.

Is that simple? I mean I had I hired two brilliant young men, right, and we sat around, we came up with these strategies, and trust me, they weren't good. But I was always a contrarian investor, and so I uncovered opportunities that were cheap. And I had made a lot of money for wealthy people, and I would go to and say, okay, uh, we're gonna buy this, and we want you to come in with us, and we'll take this share of the profits. None of them would do it, and so we did it, and we made

a lot of money. And and then I thought, dummy, you're a contrary investor. What does that mean? Nobody else likes them? Right? So I realized that I had to get a fund. You might say I got the memo very late. But then we were fabulous. We made high

returns and we had funds every year. And but isn't it amazing because I think in your booky right, that you didn't have an audited track record, right, So here you war after how many decades on Wall Street already right and involved in you know, incredible deals, and then all of a sudden you're on your own, but you don't have that track record to stage at somebody see this is what I've done. So it's amazing to have to kind of start at that level. Where were you

when I needed you? I mean, neither one of us said we had There are three of us, right, and none of us had a track record. And I mean, you gotta remember I grew up in a small town in South Georgia, right, I mean this all stuff came to me late, but you know that's the truth. Anyway, what we did was we hired one of the national accounting firms. We gave them all my tax returns, all my UH brokerage statements, and they reconstructed my investment record

that way. And people I knew were kind enough to lend their name and some of their cash to our first fund, and that's that really got it started. I want to go back there to those days at Bear Sterns because I think what's remarkable about your career is I think Wall Street was at a different time and era. I mean, I love just reading about your early interviews.

I mean, you met, you met with those four guys that we're going to leave, including A. S. Greenberg who became it seems like a pretty close friend of yours. Tell me about like the first time you walked and it wasn't your first Wall Street firm, right because you had it been at Burnham. But tell me about that first time at Bear and meeting with these guys and what it was like in those early days. Well, I

got fired around Christmas time at Burnham. I just didn't get along with Bobby Lynton and I was a green kid. I mean, you'd say, you know, you better learn to behave differently, right, But I had gone there because I was impatient. You know, I wanted to immediately be successful and not get trained and waste all my time learning how to do things. That was a big mistake. So

it didn't work out. And I had a fabulous mentor there though, Danny Cowen, who was also mentoring Warren Buffett, had bought the Berkshire Hathaway stock for him and uh, and Danny said, look, go over to bear Stearns a Screenberg is going to run it sometime and he's really fabulous. And so I went over there and that was great advice. And Danny was a wonderful and a long friend, a long time friend. And then Ace liked me, mostly because Danny said I was good. And then Ace took an

interest in my career and that's so important. People, young people today asked me, you know, you know what advice to give? I said, decide where you want to be in two to five years and get a great mentor. And so as you you know develop, you know, fast forwarding again to Tannembomb Capital, you build this up. You do create, to Carol's point, an actual track record that you can then invest against more and more funds. You're building a firm, but you're building a different sort of firm.

It feels like, in part because you're in Los Angeles, you're not you know, back in New York, you're not sort of subject to the wiles of uh sort of New York thinking what was it about being in on the West coast in l A That that might have helped the ethos of the place. Well, like I said, I got all the memos really late. I mean, serendipity has been my friend. We tried to figure out what

we were going to do with the firm. We realized we had to have funds so we could control the the purchases of the ugly investments, which mostly what we bought because when people don't like them and there's anybody left to sell and uh. After we began to to develop um track record, we became experts in credit. UH. Credit to me, especially the stress credit is the most most complex asset class. You have to understand the economy, the industry, the company, the instrument, the legal processes of

particularly like bankruptcy processes. I'm very proud that Tenet Bomb Capital Partners was one of three or four firms that put Caesar's in bankruptcy when they were abusing the investors. So we we we took calculated risks and and our first two funds were returning net a year. So you know, from there it got a lot easier. Talk to us too, about your exposure to Puerto Rico, because you do have

a home there. I am a resident, and for people who want to maintain their American citizenship, and you know, I'm a first generation American, my wife's a second and you know, and I have feelings about America. It's been a great place, and so I didn't want to give up my citizenship. But I got pretty tired of seeing my tax dollars wasted and uh and and I just liked to invest. I didn't want to build a business again. And Puerto Rico has these programs that are remarkable for

people like that. And I first heard about him through my friend John Paulson, who you know famously put a lot of money down there too, very good result of my dad. So, uh, when I looked into these programs, I realized that a professional investor, what I was going to mostly do is is by things and then at

some point get capital gains. And Puerto Rico is a is an exception to the global tax regime of the US, so that when you made new investments, that means that from when you move there, the future capital gains are not taxed. And you know, this is like heaven. And then the other part of the heaven is that uh, notwithstanding uh, having lived in Malibu for forty two years,

uh part time the last four. Uh, you know, I live it at the beach, and down there we got a lot more beach and we've got these big palm trees and uh we live in a beautiful resort that John Paulson controls, by the way. But you know it's to me, it's it's heavenly. You know, I've got two dogs who when you throw the tennis balls in the pool, they dive after them. And it's okay. You know, no one comes around and tells me I'm making too much noise.

But what about I'm just curious. I mean, you live through a couple of hurricanes down there, um, and just the problems, the economic problems, the financial problems in Puerto Rico. What's the solution you see it? You know firsthand. I'm just curious what you think. Well, you know, Puerto Rico is not unique. You could look at certain states here in the US, and I don't want to get a lot of hate mail. Who are extraordinarily poorly run where there's waste and my suspects, I used to think someone

was done. Now I realized they were crooked. Right, So there's corruption, and there's incompetence and all political units almost all, I should say it that way. But Puerto Rico was extraordinary and they brought that to a high level of of accomplishment. And Puerto Rico has extraordinary uh merit. It's the only large Caribbean island's also a commercial center, so and and manufacturing is maybe of the of the g n P. Mostly technology, it's uh, people don't realize this.

It's in medical devices, pharmaceutical So I saw really terrific possibilities there in terms of tourism and agriculture and technology, if only it were run well. And uh, we did very well investing in the bonds because there is basically something down there that has merit. Now we've had something rather unusual, you know, a tropical country that had a bloodless coup and and and don't be mistaken, this was a bloodless coup. People went out in the streets. They

didn't break windows. They didn't burn cars. I mean, hell, in Paris they do that on Saturday. So uh, and the governor, who was very tenacious, was forced to leave. And we've got lucky because just prior to that, his key aids quit to trying to save him. Right, so they fell on the sword and then he got pushed on one. So now we have a reluctant governor and she is said she's not running for re election and

wants to do what's good for Puerto Rico. This strikes me as in a unique opportunity in the history of democracies, and uh, where someone who didn't have to pander to the voters and maybe can do what's needed. And you have this independent commission like we had here in New York years ago when New York didn't have discipline, and to the extent they can get a truly balanced budget and they can make the reforms they need. It could be exceptional. You know, I'm putting more of my money

into Puerto Rico. We'll see. And what about Wall Street today? You know this many decades on. You know, I think about the various issues, to say the least big questions, both existentially but also more minor. You know you cross paths over the course of your career with Jeffrey Epstein. That clearly is one of the threads and narratives that is very much talked about on on Wall Street. Right now,

we're ten years on from the financial crisis. There are questions around income inequality in Wall streets role in all of that. What do you make a Wall Street right now? Well, are we gonna talk about the upstain of Wall Street? Come on with all right and just talk about threads. Sounds more like a rope anyway. Look, human nature is one of the great uh non changing, uh scientific assumptions

you can make. And when we talk about political systems, you know they see all the they say as these young people now in favor of socialism, you know, the humans like power, they like money, they like sex. I can say that on your program. Yes, oh good, So I have to be so careful now we're not in the college that's lucky before. But it's true. I mean, if you want to look at years, is that long enough?

I mean I'm not even at old. And uh, you know, these are themes that run across all kinds of industries and behaviors. Wall Street because of the sure amount of money that flows through and is sitting around attracts scoundrels. You know. Um, I think it was Willie Sutton who was a pioneer, uh bank robber. That's when banks were early in the West, you know, and they're just starting up, and he started robbing banks. He was a specialist. And people said, you know, you know when they called him

samestr Sutton, why was it you robbed banks? He said, because that's where the money is. Well, that's the thing about Wall Street. The temptation is rife, and so you're going to get a lot of scoundrels there, but also some of the most noble and wonderful people I've ever met who were philanthropic. I mean, we used to make what most people would think is a nice salary, but we made a multiple of that and bonuses that were a lot of people thought subjective. Since I got big bonuses,

I thought they were accurate. But but a screenberg said, you know, your partners are making a lot of money. There people in the world who aren't as lucky as you are. Five percent of your bonus is going to go to charity, and if you don't do it, We're gonna do it for you. Now have you ever heard of a big company doing that? Okay, so the the philanthropists, much like Michael Bloomberg, you know, and and Steve Schwartzman and John Paulson, people giving hundreds of millions or billions

two good works. Now, you know Karl Marks didn't count on that, did he. I have to say, like, we have these conversations a lot, and I'm for capitalism. I think it's great that people can create companies and make money. But with the right company, but right, and I have a boss that gives back a lot, and we are encouraged to do the same thing. And just to be fair, Michael Bloomberg of course the owner of Bloomberg LP and Bloomberg Radio and Bloeberg TV. But to get to Jason's point, Michael,

what do we do though? Because you write in this book I believe that for democracy to work, it is necessary to have an engaged and formed electorate. Tough to do in our complex world, especially in large countries with diverse constituencies. How do we break the gap of education? I feel like that has really divided, you know, a gap in our country. How do we do that? Well, is not everybody has the same opportunities. Was it Aristotle who wrote this originally? I think three thousand years ago?

You know, good for him, I went to trade schools. I just started reading him recently. But he said at all he said that he called him cities because that's what they were there here for a city to have good leadership, the voting. Uh, people have to have an education to make intelligent choices. What a what a timeless idea? Right? And uh? And then the other thing that you just

have to take civic exams. Right, we studied, Well, it used to be you had the Romans in the Senate and you had the landowners in England, you know, so it wasn't democratic. But you know, he also Aristotle said democracy is a political system them designed to help the poor and will eventually implode. So in Rome, they started out, you know, when the soldiers came back and they weren't

taking over countries anymore. They were restive, so they gave them bread, you know, and then they got more restive and they and they started to give them pork. And that's how political pork was named. Okay, and so this has been going on longer than we've been alive and the solution, I believe the only solution is a separation of power and competition. If if government, industry, and labor are not dominant any one of them, and so they have to always be competing, you know, for I guess

the same vote in the long run. Uh. Then then to me, that creates a moderate course, which to me is the best solution. If you study countries that succeed generally, they have a large middle class who have a stake in the system that they want to preserve. And uh, I believe very strongly education is needed for that. And the idea that people don't have to be literate or understand how our government works, to me, is a terrible mistake. So where's the power of balance off right now in

the United States? Is it more government? Is it more corporations? You won't like the answer. One of the biggest problems is for profit twenty four hour media. Media back before you two were born, used to require to get licenses renewed every three years or so that you had a news program. Think about it. They have the five o'clock news, a six o'clock news. They had to do that to get their license. Then somebody realized they could make money

out of news. And about the time they started making money out of news, where a lot of it became like showmanship and uh, you might think I'm attacking somebody in particular. Uh, the we got the twenty four ourcle twenty four hour cycle of news, which you know, there's more news capacity, there are events, and like I said, one of my favorite saying is that you never heard somebody announced that no baby fell down a well today. So everybody's looking for something dramatic to say, and then

social media just exacerbated it. So if you look at that combination of like a huge sucking noise for for some kind of salacious news, and add to that the absolutely irresponsible protection politicians have for political speech. They can lie, they can photoshop you, they can call you terrible names, and they're they're they're not subject to any legal thing. To me, this is nuts. You can't sell vitamin pills with that right, you can't sell stocks, but you can

become a political leader. How dumb is that? All Right, So, wrapping up, what's the what's the biggest surprise to you in writing this book? What did you sort of be there learn about yourself? Learn about your world, learn about history that when you when this went off to the publisher, you thought, did I didn't see that coming. I've told people who have had even just interesting lives, write a book and keep your files, because you'll learn a great

deal about your motivations and your behavior. I just felt that I had care themed through life. You know. I came to this yuggy barrow said you come to Forking Road, take it. And I hadn't realized how I made these decisions. If I had had that degree of introspection early, it would have been very helpful. And when I saw a pattern in my life and I started asking my my successful friends about theirs, and then I could see this pattern. Well, hell, it took me a long time, didn't it. I don't know.

Reading your book, it seems like you lived a pretty full life and have given back and really explored. I mean, you've been a real explorer of the world. It seems well, the Explorer Club is honoring me tonight with a book signing, So there you go, There you go. That was Michael Tanneman, private equity investor and also the author of Risk Living

on the Edge. You've been listening to Bloomberg Business Week Extra be sort of tune into Bloomberg Business Week Radio live Monday through Friday at two p on Wall Street Time. I'm Bloomberg Radio. I'm Carol Messer, and I'm Jason Kelly. This is Bloomberg