Fixing NYC's Subways Requires Study That Isn't Happening: Ravitch

Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. There has been a lot of discussion that has led up to a story yesterday that was published by the New York Times magazine that has garnered a lot of attention about the disrepair of the New York City subway system and potential catastrophe that could ensue if these problems are

not fixed. Here to speak with us about that is somebody who has intimate knowledge with the m t A and the New York City subway system, Richard Ravitch, who is the chairman and partner of Ravage, Rice and Co. Also though former Lieutenant Governor of New York State and head of the Metropolitan Transportation Authority. Thank you so much

for coming in on this incredibly snowy day. I want to start with this story in the New York Times magazine that put the bill at a hundred and eleven billion dollars conservatively that would be needed to fix the New York City subway system. Did you think that the tone of it was accurate, that we're kind of at a do or die point for the entire subway system. Well,

there is no instant solution. What has been lacking because of the board's failure to fulfill their responsibilities properly, Uh, has been There is no analysis of what it would take to restore the system. It was stating good repair. The number that the author of that article came up with was a composite of what other people said. But what you need is an analysis of what the replacement cost and useful life of every component part of the subway system is. Then you decide from that how much

is necessary. Then you prioritize, and then you look at new stations, new new challenges, and you make policy choices. But you can't start when you don't have the fundamental knowledge. And the board has failed to fulfillix responsibility in a very serious manner. They have acted negligently and irresponsibly. So, uh, how can this be fixed? The legislature of the State of New York it has a responsibility to look into this.

They are the authors of laws. They pass for Law UH in two thousand and nine, making it abundantly clear that the fiduciary responsibility of the boards of authorities like the m t A is to the purposes of the authority, and the legislature has the power to investigate, to hold hearings, to bring public's attention UH, to demand that the people who will hold these appointments fulfill their responsibility is as

the law intended that they be fulfilled. Mr Ravitch, I understand that back in nineteen seventy nine, cast your mind back. You came up with such a plan. You took a detailed look at the entire system, and you put together a playlist for what needed to happen, even how to wear a bulletproof vest. I think at one point it didn't work out the way you thought it was. You

had a call of gentleman named David Rockefeller. I'm wondering if you could just didn't you have to call him and take him from them at five am in the morning. I did because there were upstate Republicans who are reluctant to approve all the revenue measures that I had recommended to the legislature to provide a stream of revenue that we would use to support the borrowing, the capital borrowing that we needed to fix the subway system. So I needed the support of the business community in New York

to get the Republican support. But we had the support of the governor, the active support of the governor, the active support of the New York State Assembly, the active support of of the Mayor of the City of New York, um and and the unions and the business community, and and they got behind this, and they authorized or enacted legislation that provided hundreds of millions of dollars of revenue which we used to support the indebtedness that enabled me

to buy three billion dollars of subway cars. Well, but I want to sort of broaden out here, because you're underscoring fundamental flaws in the management of the subway system at a time when more broadly, we're talking about infrastructure spending and how much we can invest. Just real quick, can we even make these infrastructure investments without a wholesale change in the management? Uh. I obviously am no longer familiar with the technicians who operate at the m t A.

But I have to tell you. The professional engineers who I've known over the years have very eminently qualified. The problem isn't the professional technical management people know how to fix this. People know how to buy subway cars. People know how to change the signal system to uh triple the throughput of so we don't have as many people waiting in stations for two or three trains because of all we're crowding. Everybody knows how to do it. That's

not what's missing. What's missing his money, and money requires paying for the person was going to pay it. And and therefore the question is, in the best sense of the word in a democracy, a political question. How do you allocate the burden? We are speaking with Richard Ravitch. He is the former chairman of the Metropolitan Transportation Authority, former Lieutenant Governor of the State of New York, the author of the book So Much to Do, A Full

Life of business, politics and confronting fiscal crises. One crisis that we've been following is Puerto Rico, and Mr Ravitch has been looking at the situation in the devastated Commonwealth. And Mr Ravitch, and maybe you could offer us some thoughts about the current conditions and what if you were given a clean slate. If you were given a white board, what would you suggest be one of the first steps that has taken in order to right the ship at the first of all the three And they have million

people and it's unfortunately it's probably closer to three today. UH. Our United States citizens and they have not been treated the same way that the United States citizens in Houston, Texas or New Orleans were treated after devastating hurricanes. Are distinguished President through paper towels at them, but has failed to make any serious effort to get an amount of money to restore the power, to restore the physical infrastructure. And as a consequence, people are leaving the island. There

is no incentive for people to invest. UM. The health care system is in jeopardy. Uh. There is still a substantial percentage of the population that has to boil the water uh to um before they drink it. UM. And I talked to a friend of I know was the chairman of one of the largest banks in Puerto Rico who told me he still doesn't have power in his home and it's not because he's not rich and can't

afford it. You advise the government, correct, I advise the government and the U. S. Treasury Department, So you're advising no longer h One major issue that was facing the government is the pension obligations, and this has been one of the most onerous issues apart from the seventy billion dollars of debt UM. I'm wondering what lessons we can draw from that, you know, what, what sort of the rout out is and sort of extract lay out to the pension issues that we're seeing across the US right now.

How how bleak of a situation is this with obligations that way outstripped potential income and current current reserves. These were not obligations in curtain bad faith. They were incurred without a realistic expectation and understanding of how they would

be ultimately met. So that the underfunding of the pension system in Puerto Rico, where it's particularly egregious, they've essentially run out of the principal amount of the pension funds, and how gonna have to pay whatever benefits they wish to pay out of current revenue, which is of course diminishing UM. Elsewhere in the United States, uh from Chicago to New Jersey to Kentucky to California, I could give you a list, Colorado, there's no capacity to meet their

pension obligations. There are a lot of very serious efforts that intellectually. There are four or five major foundations that are funding studies on this subject um. And you have a very serious moral and political question. If you say you want to reduce the pension benefits for somebody who worked for govern and for twenty years, why is that

morally acceptable? But you don't want to cut the interest that you're paying this somebody who lent you money they shouldn't have lent you because you were solving when you borrowed it. And why why people in New York City billions of dollars, which is what led to the New York City fiscal crisis in all these hedge funds that lent Puerto Rico had brought hundreds of or billions and billions of dollars of the debt when they were broke, when they didn't even have a worded in financial statements,

they gambled. Why is their entitlement to interest morally superior to the payment of the pension to a former public servant. Unfortunately, we're gonna have to to leave it there. Richard Ravitch, who is the author of So Much to Do as well as former Lieutenant Governor of New York and head of the m t A. All right, we want to learn about Tesla, and we have Liam Denning are a

Bloomberg Gadfly columnists, to tell us about the Model three. Liam, is Tesla really going to be able to meet their targets when it comes to that five thousand unit mark? And how much is it going to cost for them to produce those cars? Well, the question is, well, you know, you need to take a step. I can say what actually is a target here? Because that five thousand number or and other numbers have been thrown around, like the old tens thousand a week rate that was spoken of. Um.

If a target moves over time enough, does it? Is it really still a target? I mean, it's it's it's fairly certain that Tesla will get to producing five thousand Model three a week at some point. UM. But I'm not sure we can even call it a target at this point because it has been moved around so much. We just have to call it an expectation. UM. And that was kind of the point of the column that

I published today. UM. Because the thing is, if you're really relying on these targets, um, then it's kind of hard to say that you're actually investing on the strength of those. What you're really investing on is just a general belief that Tesla will get to profitability and volume production at some point. But you're not really you're sort of trusting them, but you're not really following up with the with the verifying bit. In other words, this is

pure faith and nothing based in particular numbers. I mean, I guess that uh, sort of edifying that point is Tesla shares today they're down a little bit less than one percent. You would expect a much bigger decline with yet another disappointment from their actual production when this has been one of the key concerns. Also, there's still they're still burned through a billion dollars of cash every quarter and are probably going to have to raise more money

now you would expect. So, I mean, if you if you think back to when they reported third quarter results, which was early November, now those results were, um, you know, they missed targets across the board. There a miss forecast across the board. Um, they cut the the outlook for production of the Model three, which is kind of at

all that anyone really cares about at this point. Um, and the stork did actually fall quite sharply after that, went back below three hundred bucks a share, But since came back, I mean partly because um, you know, we had the launch of the well we call it launch, but we had the the sort of demo of of the Tesla Electric semitrucks since then, and the stock went up a bit on that and it's actually higher now

than it was in the immediate aftermas of those results. Um. But if you look forward to this year, I mean what you have a combination of here is Tesla has invested already a lot of money into building this production line,

which isn't working as planned. They haven't reached um, you know, smooth mass production of the car yet and they've had to scale back um at the pace of growth in that And if you think about that, what that means is you've invested all the money in this production line, but you're still waiting to really produce the cars that are going to generate the revenue to pay back on

that investment. And as we look forward to the rest of the year, you know, it does seem likely that unless something drastic changes in the pace at which Tesla can produce these cars, um, they are probably going to have to tap the markets for more financing this year. Whether now, whether that comes in the form of equit or another bond or a convertible or something else, um,

that is looking ever more likely. Of course, the flip side of that is, as long as the stock doesn't react badly to this, you know, consistent missing of targets, then Tesla does appear to have a ready way of raising that money. Liam Denning, thank you so much for joining us. Liam Denning, Energy Mining and Commodities calumnist for

Bloomberg Gadfly Research. No, forget about it. Meeting chief executive officers a waste of time for this fund manager, and they've actually done pretty well here to help us understand their strategy. As Kurt Kara, he is the chief investment strategist for my invest They're based in Copenhagen, Denmark, and he joins us on the phone. Kurt, thank you very

much for being with us. Just described for people your strategy and how you came to put this all together all right, Well, thank you for letting me call in very Briefly, we are very focused on being rational when we invest, So we try to be as stringent and the rational out of a sort of a moral imperative wing invest. So one of the things that we find it is very important is to be driven by data and rationality and economic understanding of the businesses we invest in.

So what we do is basically we look for if you want to catch some sort of if you want to if you want to hunt a dinosaur, you look for din dinosaur footprints and then you ask yourself if this is a dinosaur, and then you then you go for the hunting itself. So so that's basically what we do. How many stocks do you invest in at any given time? In other words, do you have to kind of concentrate your bets with this type of strategies since it requires

uh profound understanding of the businesses. Yeah, well, it's a good question because I think one of the conventional um cardinal points of investment is that you should diversify a lot. I think that there's a big difference between diversification and diversification. If we diversify too much, we actually diversify. We believe that twenty five to thirty five names is adequate. Anything about thirty five names and we will start to become index Haugust, And that's really not what we want to be.

We want to be active managers, picking the best businesses we can find that at attractive prices. And I honestly believe that if you look at, for instance, the financial crisis in in oh eight, very diversified portfolios didn't do much better than less diversified portfolios. So so in theory it may work, but in reality, I don't think the versification works. Once you're above thirty five forty names, Kurt, where do you get the confidence to maintain this level

of discipline? Oh? Well, yeah, Well, first of all, I have some good colleagues and they'll kick me if I don't if I'm not discipline. But my confidence in my and the discipline comes from I would say, first of all, having this system. We have that that sort of looks at the marketplace, looks at all the stocks in the marketplace, and gives us ideas and scores every single stock out there. And that is a very good neutral, objective view on the marketplace. And then we have our subjective views and

our subjective understanding of the businesses we invest in. The discipline, however, is obviously something which has to be learned over the years, and I believe we have done so. Uh. There is a big difference between basically eating the menu and eating the menu card, and a lot of investors perhaps eat

the card more than the menu. So it's easy to say your value invest It's easy to say we're active investors and we manage risk, but actually doing it requires discipline, and this is something we've been working on over the

years and we still work on it. Maybe just use one UH investment idea General Motors as an example, because you know when you when you hear about your strategy, you think, oh, there's some like super secret company that they're going to invest in it, and it turns out it may just be that you find a company that everybody knows about, but the way you perceive the company and the confidence you have in the decision is different. Yeah. Well, I guess GM is a great example. I mean, we

bought GM in September last year. Uh. I believe the market value was roughly around fifty billion dollars and they the enterprise value is forty billion dollars and GM generates ten billion dollars in earnings and and ten billion dollars in free cash flow. Uh. It has a female CEO, which is quite rare, so she's obviously doing a great job in a in a sector which is dominated by males. Uh So, Uh, all the things when you look at it looked okay because you know, they have autonomus driving.

They have the Chevallet bowl, the Chevallet bowl, They have the Cadillac, which is the only limo priced as a as a Mercedes basically. Uh, they have the Camaro and you know, you name it they have. They have nine percent of lift as far as I understand. So they have all these areas. And when you look at GM, it's not the old dust covered company that some people may believe it is. It is actually a company which

is up to date technologically speaking. And the price tag was very, very attractive, so you could say, you know, we don't necessarily buy gold just because it's goal. We want to buy gold when it's priced as silver. GM is perhaps silver. Priceless bronze are actually more like junk metal, whereas some of the more golden stocks in the stock market right now, they're priceless diamonds and they're not diamonds. So for us, it's all about buying the on the

valued stuff. And just wanted the breaking because I want to come into but just quickly give you ten seconds, Mary Barra, as the chairman, chief executive, it's important to you explain well, very briefly. I mean it's important because if you can make it as a CEO with your biometric measures against you and your your biological measures against you, in the sense that we know that there is an overrepresentation in boardrooms and amongst the CEOs when we look

at for instance, Caucasian males uh. Tall, slim Caucasian males are overrepresented. So if you have a CEO which is which doesn't have these features, it must be because they're doing some sort of you know, good stuff. As a CEO, they have to be outperforming significantly since they can, they can get to that position. And I think she's doing a great job and I don't have to meet her. I mean, we don't have to meet the CEO. We we look at the results they generate, uh, and that's

more important for us. Kurt Kara, thank you so much for joining us. Kurt Carra, chief investment strategist at my invest, which runs the my Invest Value Act here and which has returned on average each year in the past five years, better than percent of its peers. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm on Twitter at

pim Fox. I'm on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio.